Reddit IPO: What You Need To Know

Reddit, the popular online community with tens of thousands of subgroups dedicated to interests as varied as cryptocurrency to a childless existence, announced that it has filed a confidential report with the Securities and Exchange Commission (SEC). This marks the company’s first step towards an initial public offering (IPO).

The announcement will undoubtedly be thrilling (or disappointing) for millions of dedicated Redditors, but this won’t be the largest IPO of 2022 by any stretch. Reddit’s most recent funding round yielded $700 million, valuing the company at $10 billion—or about a seventh the size of Snap (SNAP), parent of Snapchat.

The question for potential investors is whether raising billions through an IPO will allow Reddit to invest in future growth so it can rival its competitors’ reach, or whether the company will ever enjoy anything beyond niche status in the social media ecosystem.

The Case for Reddit

Reddit’s best attribute is pretty obvious: It’s pretty popular! More than 50 million people were counted as daily active users of Reddit as of January 2021—the latest figures available—contributing to more than 50 billion monthly page views.

Perhaps more importantly, Reddit’s user metrics are seeing robust growth. As a private company, data can be hard to come by, but Reddit has disclosed that daily active users hit 52 million in October 2020, up 44% over the same month a year prior.

A recent Pew Research Center survey found that 18% of Americans say they use Reddit, up from 11% in 2019. And here’s a figure that should be especially enticing for companies looking to connect with potential consumers: Over a quarter of Americans who make more than $75,000 say they use Reddit, per Pew.

Growing engagement has led to considerable gains in advertising revenue, according to the company. In the second quarter of 2021, Reddit raked in more than $100 million in revenue, representing an almost 200% increase over the year prior.

Reddit’s growing profile played out in real time in January 2021 during the meme stock boom, which saw companies like GameStop (GME) and AMC Entertainment (AMC) surge in value after amateur day traders decided to pinch short sellers and invest en masse. The swarm of investors got their start on the r/WallStreetBets subreddit, and by the time the frenzy has peaked even Congress had gotten in on the act.

The Case Against Reddit

If only crafting a voguish social media platform were enough to become a profitable company, let alone a good investment. To really rake in the big bucks you need to have a dominant position, one that is still far away for Reddit.

For instance, 81% of Americans say they watch videos on Youtube, according to Pew, and nearly 7-in-10 claim to be Facebook users. Roughly 40% scroll through pictures on Instagram, 28% network on LinkedIn and a quarter swap evaporating messages on Snapchat.

Judged by daily active users, Reddit remains in the minor leagues. The more than 50 million daily active user figure from January 2021 compares to nearly 200 million daily active Twitter users in a similar period, while Facebook counts its daily active users in billions.

Text-based Reddit, which more closely resembles the comment boards of a bygone internet, trails far behind its rivals. That’s not to mention the dollars gobbled up by Google’s search engine or Amazon’s marketplace.

In fact, roughly two-thirds of all digital advertising is consumed by Amazon, Google and Facebook, according to eMarketer. This dominance is causing platforms more popular than Reddit to struggle.

Take Snap, which earned more than $1 billion in revenue in the third quarter of 2021, roughly 10 times Reddit’s second-quarter haul. The company has reported $3.7 billion in revenue over the past 12 months. Nevertheless, it’s stock is down 7.3% for the year, compared to a nearly 25% gain for the S&P 500.

That doesn’t mean Reddit can’t be competitive, but does suggest just how hard the road ahead will be for the company.

What You Should Do

Right now, potential investors are in wait-and-see mode. Over the following months, Reddit will release more recent financials, and outline the opportunities and pitfalls it sees ahead. Reasonable people will come to their own conclusions over its ability to deliver future cash flows.

It’s important, though, to keep an open mind, even if you’re a fan of the platform. Social media platforms and digital advertising are tricky businesses in their own right, but face the potential of more government regulation in the years ahead, especially after Facebook’s latest scandal.

Gone are the days of blind faith in the rosier world promised by tech giants.

More from Forbes Advisor