Should You Invest in Reddit (RDDT) Stock? | Investing

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Social media platform Reddit Inc. (ticker: RDDT) filed confidentially for its initial public offering in December 2021, and the delayed gratification seems to have built the buzz around the IPO to a fever pitch. After making its public filing in February, the company priced its IPO at $34 per share on March 20, and gave its most prolific users a chance to buy in at the IPO price.

Shares began trading on the afternoon of March 21, opening at $47, or 38.2% above Reddit’s IPO price. RDDT soared as high as $57.80 in intraday trading, a 70% premium to its offering price.

Here’s what you need to know about the Reddit IPO:

When Can You Buy Reddit Stock?

Reddit shares are available as of March 21, but the platform’s top users got first dibs at the IPO price before the stock began trading. After that, the general public was allowed to buy and sell Reddit shares.

What’s the Ticker Symbol for Reddit Stock?

Reddit stock trades under the ticker “RDDT” on the New York Stock Exchange.

What About Reddit’s Opening Share Price and Valuation?

On March 11, Reddit announced it would price 22 million shares of stock at between $31 and $34 per share. Reddit ended up pricing at the top of the range, at $34, which would have raised $748 million in the IPO. However, because it won’t reap profits from 6.7 million shares sold by existing stockholders, the company itself raised roughly $519 million at a valuation of $6.5 billion. Reddit was previously valued at $10 billion in a funding round in 2021.

Investors should know that IPOs are often intentionally priced a bit low by the issuing company and the investment banks that take the stock public, in an effort to essentially engineer good press through a price pop on the inaugural day of trading.

When Was Reddit Founded?

University of Virginia roommates Steve Huffman and Alexis Ohanian started the company in 2005. A third founder, Aaron Swartz, was also with Reddit from the beginning, although he left the company in 2007. Huffman and Ohanian would follow in 2009. Condé Nast purchased the company in October 2006, but it was part of a 2011 spinoff that saw Reddit fall under the ownership of Condé Nast’s parent company, Advance Publications.

After a leadership shakeup, Huffman is back as CEO of Reddit, recently defending backlash from volunteer moderators related to his $193 million compensation package.

What’s Reddit’s Current Financial Picture?

Although Reddit recently reported a $90.8 million net loss last year, 2023 revenues rose by 20.5% to $804 million. The social media platform had 73.1 million daily active users in the fourth quarter of 2023. That’s a big jump from the 52 million users the company reported in 2021.

How Can You Buy Reddit Stock?

Anyone with an active investment account with a brokerage firm can buy shares of Reddit stock. Additionally, Reddit reserved 8% of its shares (about 1.76 million shares) for “loyal Redditors” who’ve been frequent platform users over the longest period of time.

Should You Invest in Reddit Stock?

Deciding whether or not to invest in Reddit depends on a few key factors. These issues top that list:

Is It a Good Time to Buy an IPO Stock?

“2023 was a quiet year for IPOs, and those that did debut didn’t encourage others to follow. 2024 is not off to a great start,” says Phil Haslett of EquityZen, a New York City-based pre-IPO investment firm. “For example, BrightSpring, one of the early 2024 IPOs, priced below its estimated range, and closed down 15%.”

So the IPO market isn’t firing on all cylinders in 2024, but there are recent positive signs. On March 20, data center firm Astera Labs Inc. (ALAB) debuted with a 72% surge in its stock price.

In addition, the macro environment suggests a welcoming market. “We’re seeing low volatility, inflation stabilized, and strong GDP and employment,” Haslett says. “Plus, there’s interest rate stability and the potential end of Federal Reserve rate hikes and possibly even cuts. With these factors in play, the IPO pipeline is growing. Renaissance Capital predicts 120 to 170 deals in 2024 that will raise $20 billion to $45 billion. By comparison, 108 deals raised $19.4 billion in 2023.”

What’s the Best Way to Measure Investor Interest?

Gauging investor interest is usually a good barometer of IPO return potential, but that tactic might prove trickier with Reddit.

“Investor interest is hard to measure and is actively debated publicly on Reddit’s own forums, which makes this a fascinating situation,” says Don Montanaro, president of Firstrade, a New York-based brokerage firm.

The critical aspect of valuing any company, especially one moving from private to public markets, is determining the company’s closest “comparables,” or the already-public firms that Reddit is measured against.

“After initial post-debut volatility, a stock typically settles into a revenue or earnings multiple in line with the public firms it is considered most similar to,” Montanaro says. “Prospective investors might look at Snap Inc. (SNAP), another social media company similarly built on UGC, or user-generated content, which is also unprofitable.” Snap currently trades at around four times its trailing 12-month revenue.

“With $804 million in reported 2023 revenue, Reddit is aiming to come out at a seven or eight times revenue multiple,” Montanaro adds. “With the recent reveal of recent data sales to some AI firms, Reddit hopes investors will consider it more similar to Meta Platforms Inc. (META), a profitable social media firm that’s a true player in the AI space, trading at almost 10 times its revenue.”

Does the Reddit IPO Have Good Timing?

Reddit’s IPO will be the first for a U.S. social media company since Pinterest Inc.’s (PINS) debut in 2019.

“We believe this marks a new chapter in the social media industry, indicating the success and viability of community-based social networks,” says Ido Caspi, a research analyst at Global X in New York. “Reddit’s success also validates the theme’s potential for relentless innovation. AI could be another major catalyst that brings more growth to the theme this decade.”

Reddit is also entering the public markets at a great time, right when the digital advertising industry is experiencing a strong resurgence, Caspi says. “Major advertising events like the upcoming summer Olympics and U.S. presidential election are on the horizon, alongside a more favorable macroeconomic environment,” he says. “Global advertising spending is forecast to increase 10% in 2024, signaling a positive outlook for the industry worldwide, and digital advertising spending is also expected to account for 75% of total ad spend by 2027.”

How Will Reddit Use AI to Boost Profitability?

Reddit’s move to use artificial intelligence as an alternate monetization lever indicates a “unique emerging opportunity” for a social media platform dense with user data and engagement and looking to boost revenue and profitability, Caspi says.

“This likely signals a new phase in leveraging social media assets beyond traditional advertising, and we’re excited for the possibilities this presents for the industry,” Caspi says. “Reddit has already announced early data licensing arrangements with contract values over $200 million, as well as a deal with Alphabet Inc. (GOOG, GOOGL) to enable Google’s AI products to leverage Reddit data.”

Takeaway on the Reddit IPO

“Profitability and strong unit economics remain important for IPO investors, given the reality of higher rates and tighter liquidity,” Caspi notes. “However, given Reddit’s brand, the surprise AI monetization angle and the company’s rapid growth, we could see a warm reception for the IPO. We expect a handful of other tech IPO hopefuls to revisit the IPO markets should Reddit’s debut prove successful.”

In addition to advertising and AI, Caspi thinks Reddit has plenty of tools at its disposal to be aggressive and chase profitability.

“The platform is extremely dense with engagement, and it appeals to a loyal base of users,” he says. “Management thus far has been cautious in monetizing without hurting the platform uniqueness, but we see plenty of room to boost revenues using levers such as commerce, payments, entertainment, subscriptions and more.”

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