Jim Cramer Says Successful Reddit IPO Could Spell Trouble For Stocks: 'Those Who Want The Bull To Continue Must Root Against This Deal

Jim Cramer on Sunday expressed concerns about the potential impact of a successful Reddit IPO on the current bull market.

What Happened: In a recent CNBC article, Cramer highlighted the unusual nature of Reddit’s IPO, which is expected to be valued at $7 billion, with shares priced between $31 and $34. Despite being in operation for 19 years, Reddit has never turned a profit, relying solely on adjusted EBITDA.

“It's been around for 19 years and it still hasn't produced anything but adjusted EBITDA (earnings before interest, taxes, depreciation, and amortization), an alternative measure of financial performance that I will not recognize because it has lost money for too many of us.”

Despite this, the company’s $804 million revenue in 2023 has piqued the interest of institutional investors. The IPO is set to include employee stock sales, potentially attracting buyers from the GameStop era and Robinhood’s options trading community.

Cramer noted that the success or failure of Reddit’s IPO could significantly impact the market’s supply and demand dynamics. He also drew comparisons between Reddit and other companies like Arm Holdings and Instacart, emphasizing the unique challenges Reddit faces due to its unconventional business model.

“I do know this: If Reddit rallies, there will be others to follow. If it doesn't, we could see a continuation of the lack of share supply, which is a function of endless buybacks that drive down the natural supply.”

He also expressed skepticism about Reddit’s ability to transition from a message board to a successful business, citing the platform’s “fractious and at times unruly readership of more than 70 million people.”

“It needs to produce a nice pop but not a huge one or it will open at its high, trade a little higher midday, and then begin the sickening slide lower that is reserved for money-losing companies — adjusted EBITDA, or otherwise. Those who want the bull to continue must root against this deal and bet that it fails to hold the opening.”

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Why It Matters: Reddit’s IPO has been a topic of interest for some time. The company’s decision to reserve a portion of its IPO shares for its most active users was seen as a bold move to strengthen user loyalty. However, this strategy also posed unique risks.

Reddit’s IPO valuation was also a point of discussion. The company aimed for a $7 billion valuation, a significant decrease from its previous $10 billion valuation. This decrease reflected a broader trend of investor skepticism towards unprofitable companies.

Despite these concerns, Reddit’s IPO was seen as a milestone event for the tech industry, as it will be the year’s first significant tech IPO. The company’s 20% increase in annual revenue for 2023, primarily from its online advertising business, was also seen as a positive sign.

However, Reddit’s revenue primarily stems from advertising, constituting a whopping 98% of its $804 million revenue in 2023. While the advertising model appears robust, red flags emerge when examining the penetration rate based on Daily Active Uniques (DAUq) and Weekly Active Uniques (WAUq). The challenge lies in reconciling these metrics to assess the platform's growth potential within and beyond the U.S.

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