Equity Crowdfunding Research & Education

Here comes Reddit, the most anticipated IPO of the year!

As soon as tomorrow, the social media company plans to go public at $31 to $34 per share.

That would give it a valuation of about $6.5 billion.

One expert believes it could deliver a hundred-bagger — in other words, 100x your money.

Should you invest? Let’s take a look.

The Reddit Story

Reddit is a social-media platform and online community where users engage in discussions, share content, and vote on posts and comments.

Users join specific Reddit communities that focus on their interests. These communities are called subreddits. The most popular ones include “funny,” with more than fifty-seven million members; “memes,” with about thirty million members; and “WallStreetBets” (which famously rallied around GameStop stock in 2021), with about fifteen million members.

The company was founded in 2005 by two former roommates from the University of Virginia — Steve Huffman and Alexis Ohanian — and their friend Aaron Swartz. Just one year later, it was acquired by magazine publisher Condé Nast for $10 million.

Reddit has grown by leaps and bounds since then. It’s currently the 16th-most-visited website on the internet, and the seventh-most-popular social networking site. Furthermore, its investors now include OpenAI CEO Sam Altman, who’s invested at least $60 million into the company; Peter Thiel, the co-founder of PayPal (PYPL) and Palantir (PLTR); and Fidelity Investments.

The Business

But Reddit isn’t just a community. It’s also a business. Here’s what its business looks like.

100,000 active communities (subreddits), 73 million daily active users, and one billion cumulative posts.
Reddit makes money through advertising. Reddit also offers a premium membership for users who don’t want to see ads. The cost is $5.99 per month or $49.99 per year.
A recent deal gives Google access to Reddit’s user-generated content. Google will use this content to help train its AI systems. The deal is worth ~$60 million per year.
Reddit isn’t profitable, but the company’s revenues are growing. Its revenue in 2023 was $804 million, up from $666 million in 2022. Its net loss for 2023 was $90.8 million.

The IPO

Reddit’s $6.5 billion IPO is expected to happen tomorrow.

Morgan Stanley and Goldman Sachs are the lead underwriters, and the company will trade on the New York Stock Exchange (NYSE) with the ticker symbol RDDT.

This will be one of the most closely watched IPOs of 2024.

It’s the first major tech company this year to have an initial public offering, and the first IPO of a social media company since Pinterest went public in 2019.

So, what do you think — should you invest?

100X Potential

By many industry metrics, Reddit’s $6.5 billion IPO valuation looks about right.

For example, at that valuation, Reddit will have a “market valuation per daily active user” that’s lower than Meta’s, but higher than Snap’s:

Meta, the parent of Facebook, has a market value per daily active user of about $387. That’s a $1.1 trillion market cap divided by 3 billion Daily Active Users (DAUs).
Snap’s market value per daily active user is about $71 ($28.7 billion / 406 million DAUs).
Reddit, meanwhile, will have a market value per daily active user of about $89 ($6.5 billion / 73 million DAUs).

But some experts believe Reddit is vastly undervalued at this level.

Scott Galloway, for example, believes the company’s market cap could grow 100x from here. Galloway is an NYU professor, serial entrepreneur, podcast host, and prominent board director and advisor.

His core argument is that, in today’s world, the most valuable consumer companies have figured out how to monetize attention. In fact, he calls attention the “new oil.”

On this measure, Reddit is a beast. The company attracts more monthly users than Pinterest or LinkedIn — but its valuation is tiny as compared to these giants.

He believes Reddit’s low valuation is due to widely-known challenges in its ad tech and business model. But he notes the company is already making rapid progress on these fronts — for example, it’s restricted API access (“akin to plugging leaks in its pipeline”), and rolled out new advertiser tools.

As he wrote about Reddit: “History — along with any recognition of just how difficult it is to build a global platform like Alphabet or Google — suggests the upside potential is asymmetric.”

How much upside does he think there is? Here’s Galloway:

At an anticipated pricing that puts the valuation at $6.5 billion, Reddit is the only firm I can think of that has an opaque, but visible, path to a 100x return. Figuring out the monetization is hard. Developing a product that commands this level of attention is harder, and Reddit has done it.

It Pays To Get in Early

Despite Reddit’s upside potential, we believe you shouldn’t rush out to invest in its IPO.

Here are three reasons you should hold your horses:

There are plenty of dissenting opinions about Reddit’s potential. For example, David Trainer, CEO of New Constructs, a research firm that’s powered by artificial intelligence, says: “Reddit looks overvalued, and we think investors should pass on this IPO.”
The investment banks that underwrite initial public offerings typically “engineer” the IPO price so it pops significantly before investors like you have a chance to buy-in. In other words, it’s not unlikely you’d be buying at an artificially “high” price.
About 1.76 million shares of Reddit stock have been allocated to Reddit’s top contributors. They’ll be able to sell their shares right at the IPO, without waiting for the typical six-month holding period. This could put enormous selling pressure on the stock.

So, what’s a better strategy than buying at the IPO? Well, in general, the better strategy is getting in even earlier. In other words, buying before the IPO.

As long-time Crowdability readers know, it can pay to get in early, when companies are young and privately-held. For example, Peter Thiel invested $500,000 into Facebook when it was still private. By the time the company IPO’d, those shares had rocketed to a value of $1 billion.

But given the upside potential with Reddit, we believe you should still consider an investment in its public stock — just not quite yet.

Instead, wait until the company reports its first quarterly earnings as a public company. At that point, we’ll have a clearer signal about its path to revenue growth and profitability.

That’s what we’ll be doing.

Happy Investing!

Best Regards,