After years of anticipation, Reddit is finally expected to conduct its initial public offering (IPO) and is estimated to debut at a $6.5 billion valuation, according to the recent prospectus. Nicknamed the “front page of the internet,” Reddit offers message boards that allow users to ask questions on virtually unlimited topics and receive answers from fellow “redditors.” The company is expected to debut March 21 and trade on the New York Stock Exchange under the ticker symbol RDDT. 

The company is planning an unusual offering, letting users participate in the IPO, whereas IPOs are almost always limited to connected insiders. Here’s what you need to know about Reddit’s unusual IPO, including some key risks. 

What are the details of the Reddit IPO? 

Reddit has been rumored to IPO for years, but 2024 is the year that it’s finally happening. The stock market has been on a tear for the last 15 months, and after some of the worst years for IPOs in decades, companies wanting to go public are finding that it’s a more attractive time to do so. 

While the timing might be relatively strong for an IPO, Reddit may not be coming out at the best time either. It was valued at $10 billion in August 2021 as near-zero interest rates caused a  surge of animal spirits before the Federal Reserve began raising interest rates in early 2022. Now the company is looking at a valuation of just two-thirds of that, with shares priced at $31-$34, though this price range may climb if underwriters think they can do so. So insiders may view now as an attractive time to launch the IPO while the market stays hot.

Despite the lower valuation, the IPO is said to be oversubscribed by up to five times, according to various reports. The outpouring of investor interest is not exactly unusual for an IPO, but it is significant, given the unending history of losses at Reddit. The firm has never turned a profit in its two decades of existence, though it slashed its losses in 2023, compared to the year before. 

Unusually, Reddit is offering stock to its redditors and other insiders, reserving up to 8 percent of the stock for them. In addition, the company is also offering stock to individual investors through well-known online brokerages such as SoFi and E-Trade – a potential warning sign to investors (more below).

Reddit boasts 73 million daily active unique users and some 267 million weekly active unique users across more than 100,000 boards, or subreddits, according to the company’s prospectus. In 2021, it sprung into broader consciousness, especially among investors. The subreddit r/wallstreetbets helped popularize the stock of retailer GameStop, and the stock soared tens of times in value over a few months.

Reddit’s key financials

Following the IPO, Reddit will have a strong balance sheet, an important feature considering its inability to turn a profit so far. The company will have nearly $1.5 billion in cash and equivalents, against no debt and relatively minimal other liabilities.  

Where things look dicey, however, is the company’s lack of profitability historically. While the trend moved in the right direction in 2023, the company still posted a substantial loss. After hemorrhaging nearly $159 million in 2022, Reddit lost just $91 million in 2023.

That loss comes on top of strong revenue growth of more than 20 percent year-over-year in 2023. In other words, Reddit lost more than 11 cents on every dollar of revenue in 2023. Again, that’s better than its 2022 performance, when it lost nearly 24 cents on every sales dollar. So, investors will want to see the company continue to grow sales while holding the line on costs.

Investing risks of the Reddit IPO

The Reddit IPO also presents some key risks, including at least one that’s typical of recent tech IPOs. Taken together, these risks paint an unflattering picture of the IPO opportunity. 

Track record of losses

Reddit has lost money every year since its founding in 2005, so it’s a big question mark whether the company can ever make money after two decades of seemingly being unable to do so. 

Multi-share class structure

Reddit has multiple share classes, with millions of Class A and Class B shares and the potential to issue Class C shares as well, though the company says it has no current plans to offer Class C stock. The voting rights differ substantially in each case: 

  • Class A stock has one vote per share.
  • Class B stock has ten votes per share.
  • Class C stock has no votes per share. 

By giving insiders the more powerful Class B shares, this structure sets them up in a privileged position, compared to outside shareholders. With a relatively small holding, insiders can effectively control matters that require a shareholder vote. And that’s what is going on at Reddit. 

In total, the holders of Class B stock will have 97.1 percent of the voting power, when looking at their ownership stakes in both A and B shares. Since the IPO will sell only Class A shares, new shareholders are at the whim of entrenched insiders. Unsurprisingly, this setup is unpopular with investors, asking them for money but giving them virtually no say in key decisions. That said, a number of tech IPOs such as Slack and Coinbase have used multi-class share structures.

Sales to retail investors

Reddit is reserving 8 percent of its shares in this offering for redditors, some members of the board of directors as well as friends and family of employees and directors. Reddit is also offering stock to individual investors through E-Trade, Fidelity Investments, SoFi and Robinhood. 

IPOs are normally hard to access for individual investors (read: impossible). Shares are normally reserved for the privileged partners of the IPO underwriters, and they offer the potential for gains that are almost locked in from Day 1 with the legendary IPO pop. So, retail investors aren’t being too cynical when they question why they may get a cut of the action now and why insiders and underwriters seem willing to let them have a seat at the table this time around.

Bottom line

As with all investment decisions, the decision to participate in the Reddit IPO, either before the offering or shortly after the debut, should be based on your own financial situation. But given the risks in the company, especially a record of losses, and the historically poor record of IPO performance in the first year (not including the first-day IPO pop), investors may want to wait for further clarity before deciding whether or not the stock has a place in their portfolios.

Editorial Disclaimer: All investors are advised to conduct their own independent research into investment strategies before making an investment decision. In addition, investors are advised that past investment product performance is no guarantee of future price appreciation.

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