It has been quite some time since we last anticipated a great IPO.
The upcoming one will be Reddit, Inc. (NYSE: RDDT) on Thursday, 21 March. Over in Asia, we might not feel the anticipation and excitement, but it is definitely the most talked-about stock in the US and the West right now.
Here are the things you need to know about the IPO before subscribing or trading it.
Reddit’s business model
Reddit is a community-driven social media platform with a common cause or interest.
Communities on Reddit are organized based on specific interests and are called subreddits. Within subreddits, Redditors engage in active and in-depth conversations by sharing experiences, submitting links, uploading images and videos, and replying to one another in comment threads on any topic.
Subreddits are denoted by an “r/” before their names: r/ explainlikeimfive helps people learn anything with child-friendly explanations; r/ lgbt helps people find their identity; and r/ BeyondTheBump helps people transition from pregnancy to parenthood.
Redditors invest time to shape their communities, share their experiences, send support and supplies when someone is down on their luck, and even code scripts and develop tools to advance their communities.
It is essential what Facebook Groups should be doing, but has failed to achieve.
And with the growing network effect, where an average of 75 million people visit Reddit, the company monetizes its website via advertisements, which constitute most of its total revenue.
Due to its signature indexing and categorizing of each subreddit, Reddit claims it helps advertisers advertise with more context and effectiveness.
It is seeking a valuation of USD 6.5 billion
Through this IPO, Reddit will be raising USD 748 million. That will give the company a valuation of USD 6.5 billion.
The company sold 22 million shares at US$34 per share, which was at the top of its indicated range of US$31 to US$34.
One social media company that can be used to compare against Reddit’s valuation would be Snap Inc (NYSE: SNAP). Snap is currently valued at USD 19.66 billion, around 3 times more than Reddit.
| Snap | ||
| Revenue | $804 mil | $ 4.6 bil |
| Revenue growth % | +21% | +0.1% |
| Operating losses | -$ 140 mil | -$ 1.4 bil |
| Operating losses growth % | -19% | +16% |
| Operating margin % | -17.4% | -30.4% |
| Price to Sales | ~1.2x | 3.91x |
| Market Cap | $ 6.5 bil | $ 19.7 bil |
Revenue-wise, Snap is 6x larger than Reddit but it is pulling in more losses at an operating margin of -30.4%, as compared to Reddit’s -17.4%.
In terms of Daily Active Users (DAUs), Snap has ~406 million DAUs, while Reddit only has 70 million DAUs, which is also around 6 times less.
It had a private market worth of USD 10 billion in 2021
Times are not favouring loss-making companies today.
Reddit used to be worth USD 10 billion back in 2021, according to deal-tracking service PitchBook.
With an IPO valuation of USD 6.5 billion, it’s at a steep 35% discount.
The funding came in at a total of USD 1.3 billion, which is a much hefty sum than the IPO proceeds.
Reddit’s latest balance sheet still shows it holds USD 1.27 billion in cash, cash equivalents, and marketable securities. It’s not short of cash.
Notable existing shareholders & upcoming shareholders
Reddit’s largest shareholder is Advance Magazine Publishers, part of the Newhouse family publishing empire that owns Conde Nast. They bought Reddit in 2006 and spun it out in 2011.
Other large shareholders include chief operating officer Jennifer Wong, as well as FMR and entities affiliated with OpenAI chief executive Sam Altman, Tencent Holdings, Vy Capital, Quiet Capital, and Tacit Capital, according to the filings.
As for upcoming new shareholders, about 8% of the IPO shares are being set aside for Reddit users and moderators who created accounts before Jan 1, as well as some board members and friends and family of some employees and directors. These shares will not be subject to a lock-up, meaning the owners can sell them on the opening day of trading,
Latest total operating expenses topping USD 944 mil
From a total operating expenses perspective, Reddit seems to be spending more than it is earning.
However, when reconciling this with its cashflow statements, it becomes apparent that Reddit burns less cash than its reported expenses, as a bulk of the adjustments come from stock-based compensations that are not denominated.
Reddit’s business model should not be cash or asset-intensive. The current cash on hand, plus any amount raised during the IPO, should allow the company to operate and grow for the next few years without huge concerns of shortage.
Reddit’s “moat” is the same as all social media platforms – with a twist
For social media platforms, regardless of Facebook, Instagram, or TikTok, their strength and relevance are rooted in the network effect.
For whatever reasons, good or bad, users tend to congregate on their preferred social media platforms. When this occurs on a large scale, it create the network effect – where everyone chooses to be online at the same place.
This effect, when it reaches a certain size, provides the social media platforms with the means to become advertising companies. This is why all social media platforms have advertising businesses to monetize their active users.
In the Western world, where Reddit has reached a certain size and established a reputation, active users will log in directly via the website address or mobile app. But for other parts of the world, you could or would have chanced upon Reddit through a Google Search.
Thus, any changes to Google’s algorithm that do not rank and index Reddit as a search result would be detrimental to its growth prospect.
Concurrently, if Reddit cannot maintain its current user base, it too will face redundancy as the ultimate risk.
My take
I appreciate the void that Reddit fills. Google search results these days are largely affected by companies or enterprises that pay to be featured as the top results.
Honest good advice, tips and tricks, or even a simple space for like-minded individuals to congregate have also been buried under the monetization of search engines and social media platforms.
But can this niche segment scale and grow to the size of Meta Platforms Inc (NASDAQ: META)? Not easy, judging from the prevalence of other flashy apps that command more screen time than a well-indexed forum.
That said, Reddit has perfected the art of creating the best-in-class forum-esque platform. But whenever I glance across at the heads absorbed in their phones, easily 49 out of 50 are engrossed in dramas, games, videos, social media platforms, or football matches.
Unless something groundbreaking happens, this niche offering will continue to stay niche. Good for topic and interest aggregators.
But definitely not a good investing thesis in my opinion.
