Will Investors Upvote Reddit's IPO in a Tough Ad Market?

The buzzy social media platform is targeting a $6.4 billion (£5 billion) valuation, but its 19 year-old owner hasn't even turned a profit yet

Sarah Hansen 13 March, 2024 | 11:36AM
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Even as the market hits record highs, social media platform Reddit's initial public offering (IPO) will test investor appetite for a newly-minted stock. Remember: the company is yet to turn a profit and operates in a highly competitive industry.

Ahead of its listing on the New York Stock Exchange, Reddit has laid out a plan to expand its nascent advertising business and diversify its revenue sources by licensing its content to third parties. The company's cash flows are improving, and it's generated buzz by reserving some shares at its IPO price for users.

However, buyers will own shares of a company that hasn't seen a full year of profitability.

Reddit also faces stiff competition for ad dollars from established firms many times its size, including Alphabet (GOOGL) and Meta Platforms (META), itself a giant in the social media landscape, and one of the "Magnificent Seven". The site is also no stranger to controversy, most recently over its 2023 decision to charge third-party developers for API access.

As interest rates have climbed over the past few years, investors have soured on paying premiums for companies with no clear path to profitability, according to Nick Smith, senior research analyst at Renaissance Capital. In that sense, he says, "Reddit will certainly be one to watch".

Reddit's IPO is expected to price on Wednesday March 20, with the stock beginning to trade in the open market the next day. That feels like a long way from the drama of 2021, when the company's platform played host to an insurgent-like thread of activist investors who caused US hedge funds some serious headaches by artificially inflating the share price of once-written-off games business GameStop (GME).

Reddit IPO Valuation

Reddit is targeting a valuation of $6.4 billion (£5 billion) – significantly less than the $10 billion price tag it carried in 2021, according to PitchBook Data.

That fundraising round was led by Fidelity Investments, whose Blue Chip Growth fund now holds roughly $17 million worth of Reddit shares (a 0.032% weight in its portfolio).

Reddit is expected to issue 22 million shares and is targeting a price range of $31-$34 per share, according to the registration statement filed with the SEC. Reddit made headlines after announcing that a small portion of those shares would be reserved for users. The listing is also sure to command attention because of the role Reddit's WallStreetBets community played in the meme stock frenzy of 2021.

This will be the first major social-media IPO since Pinterest (PINS) debuted in 2019. Shares will trade on the New York Stock Exchange under the ticker "RDDT".

Reddit Still Unprofitable Despite Growing Revenue

While the company's cash flow is improving, Reddit has yet to see an annual profit. The firm reported a net loss of $90.8 million in the 2023 calendar year on revenue of $804 million, compared with a $158.5 million loss on $666.7 million in revenue in 2022. The company acknowledges that it is in the "early stages" of monetising its platform – 19 years after it was first founded by two university students in 2005.

The vast majority of Reddit's revenue now comes from advertising. Some 98% of its cash flow was from third-party advertising on the platform in 2022 and 2023. Much of that advertising comes from a small core group of customers.

The company's plans to diversify its revenue streams include licensing its vast pool of user data to third parties for various purposes, including research and training artificial intelligence models. Analysts say this could draw attention from investors, especially given the connection to the AI theme, which has propelled markets higher this year.

Social Media Stocks Face Competitive Landscape

This comes after a series of buzzy listings – Arm Holdings (ARM), Instacart (Maplebear) (CART), Klaviyo (KVYO), and Birkenstock (BIRK) – failed to ignite the IPO market last autumn. With stocks fresh off a major rally to start the year and the interest-rate landscape looking more certain, investors wonder whether Reddit's debut will open the floodgates for new listings in 2024.

Analysts say Snap (SNAP) and Pinterest will be Reddit's closest competitors in public markets. Both have struggled since the beginning of the year, with the Snapchat owner down nearly 30% since January and Pinterest down 7.3%, while tech titans like Meta and Alphabet have soared. Snap and Pinterest carry market capitalisations of $19.5 billion and $23.7 billion, respectively.

Michael Hodel, Morningstar's director of communication services equity research, recently pointed out that, as a smaller company, Snap could struggle to pull in ad dollars.

"We believe Wide-Moat firms such as Meta and Alphabet, which have proved the value of their ad inventories to advertisers over the years and together dominate the market, will probably continue to take more digital ad dollars over time," he wrote.

Reddit may now see a similar challenge, especially with advertising budgets still recovering.

"We face significant competition across many areas of our business," the company's IPO filing reads.

"We compete directly with all other major advertising platforms as well as publishers including: Google, Meta, Snapchat, TikTok, Pinterest, and X."

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Sarah Hansen  is markets reporter at Morningstar.com

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