Yahoo Finance Reddit’s Going Public — Should You Buy Right Away or Wait To Invest?
Reddit is going public, having filed for an initial public offering (IPO) with the Securities and Exchange Commission on Feb. 22. This will be the first major tech IPO of the year and the first social media IPO since Pinterest in 2019, according to CNBC.
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The company plans to trade on the New York Stock Exchange under the ticker symbol “RDDT,” according to the filing. The IPO is slated for March.
What also makes Reddit’s IPO notable is that it plans to place a large part of its IPO shares in the hands of 75,000 of its most prolific so-called redditors — “an unusual move that could build loyalty but also comes with risk,” as The Wall Street Journal reported. In turn, they will be able to buy Reddit shares at its IPO price before the stock starts trading. This is “a privilege normally reserved only for big investors,” The Wall Street Journal added.
“We want this sense of ownership to be reflected in real ownership — for our users to be our owners,” the Reddit IPO filing read. “Becoming a public company makes this possible. With this in mind, we are excited to invite the users and moderators who have contributed to Reddit to buy shares in our IPO, alongside our investors.”
Yet, this might prove risky for the company, some experts and redditors noted, and in turn, risky for investors.
For instance, redditor Realistic_Weight_842 asked as to whether Reddit is worth being a publicly traded company.
“As much as I love Reddit, I do not see it being public material. If anything I think it devalues Reddit because now the board has to do things for investors ,” that redditor wrote. “Reddit just stay private and do what you want when you want to keep the Reddit community as it is.”
One user stated what they see as the biggest red flag: “The biggest issues with this company as a whole and their business model — It’s all based on free labor,” posted ReallyNotATrollAtAll.
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Will Involving the Reddit User Base Pay Off For The Stock?
Peter C. Earle, senior economist with the American Institute for Economic Research, noted that Reddit — “essentially the world’s leading message board” — is taking an unconventional route to its IPO by aiming to involve its community.
“Top users who are otherwise completely unaffiliated with the company itself, including moderators, may be allowed to purchase shares,” he said, adding that other social media firms such as Meta and X (formerly Twitter) did not extend shareholder opportunities to frequent users of their platforms.
“And that highlights the laissez-faire, spontaneous order ethics of Reddit’s content and moderation philosophy,” he added.
While Earle underscored the fact that no one can predict how the IPO will go, Reddit has faced its share of controversy in recent years.
“Developer access rules have changed, and a recent licensing deal with Google for data scraping rankled many users,” he said.
Is Reddit Actually Profitable? The IPO May Tell The Tale
Most importantly, he added, the IPO will be a referendum on expectations of Reddit’s future profitability, which has yet to be demonstrated even as revenue has grown.
As a point of comparison, Earle said that while every IPO is different, there are some general patterns that investors can draw some conclusions from.
For instance, the first day mean returns of IPOs over the past five years have been quite strong: 24% in 2019, 42% in 2020, 32% in 2021, 49% in 2022, and 12% in 2023.
Experts Remain Cautious Over Opinion on Reddit IPO
Some experts warned investors to not buy Reddit’s stock when it goes public in March, arguing that they could be overpaying at the start.
“You should instead wait until after Reddit reports its first quarterly results as a public company,” said Peter Cohan, associate professor of management practice at Babson College.
Cohan added that unless the company exceeds investors’ expectations for growth and profitability, that report will send the stock down.
“If you think that makes the stock a bargain, you could buy then,” he said.
He noted, however, that he is skeptical about the long-term prospects for Reddit, as it is competing with Facebook and Google for advertising but lacks the sophisticated ad platform needed to take market share from those giants.
“In addition, Reddit hosts many discussion boards with content that most advertisers would like to avoid,” he said, adding that Reddit plans to sell that content to companies using it to train AI chatbots. This could ultimately serve up Reddit’s content in a way that sinks the company’s advertising business, Cohan suggested.
“I would watch this story from the sidelines,” he added.
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This article originally appeared on GOBankingRates.com: Reddit’s Going Public — Should You Buy Right Away or Wait To Invest?
