Reddit's IPO Buzz: What Investors Must Be Aware (Or Wary) Of

Reddit user u/k_ristovski offered a detailed breakdown of the social media platform’s initial public offering (IPO) prospectus.

Reddit’s IPO – The most important details & red flags

Here are some potential opportunities and pitfalls that investors considering the Reddit IPO must be aware (or wary) of.

Penetration Rate And Growth Beyond US

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.

Data As Asset and Future Revenue Stream

Looking forward, Reddit’s data emerges as a significant asset, evidenced by a $60 million partnership with Google aka Alphabet Inc. GOOG GOOGL. This move toward data licensing could create a considerable revenue stream and stir excitement around the IPO.

Reddit’s Profit Problem

Despite 19 years in the market, Reddit is yet to turn a profit, posting annual losses of around $100 million. With high R&D expenses, modest revenue growth, and a valuation expectation above $5 billion, investors must carefully consider the sustainability of Reddit’s current business model.

Related: Is Reddit’s Business Model A ‘Ticking Time Bomb’?

Reddit’s Motive, Strategy & Valuation

The IPO raises questions about Reddit’s motives. With sufficient cash to cover losses, the main drivers appear to be liquidity for existing shareholders and executive compensation, particularly for CEO Sam Altman. Sam Altman, associated with OpenAI, holds significant voting power in Reddit. The lack of clarity on any licensing deal between OpenAI and Reddit raises eyebrows.

Additionally, the IPO strategy appears aimed at maximizing demand, with a directed share program for qualified Reddit users and moderators. This psychological ploy may create a sense of exclusivity, potentially inflating demand.

Coming to valuation, Reddit’s worth based on the advertising model and cash on hand brings the valuation to around $3 billion.

The looming question remains: Can the data licensing revenue stream justify the $5 billion+ valuation?

Read Next: Reddit Sets Stage For Major 2024 IPO, Targets March Launch On NYSE