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5 Things to Know About Reddit IPO, The Self-Proclaimed Front Page of the Internet (RDDT:NYSE)

Reddit has strong user-base growth, but is still not profit-making yet.

On 21 March 2024, Reddit, a large aggregator of online forums, listed its shares on the New York Stock Exchange. Perhaps all investors might be familiar with how people on one of the reddit forum threads, r/WallStreetBets, got together to go long on Gamestop stock sometime back, causing the stock to skyrocket.

Aside from dramatical news like this, many hobbyists such as smart home enthusiasts, gamers, and even literature enthusiasts, go onto various subreddits (as the forum sections are called) to discuss their interests.

There was much buzz in the market with many redditors keen to own the stock. At the same time, there was also pessimism on the subreddit r/WallStreetBets, with members planning to short the stock as soon as it began trading.

With that in mind, here are 5 things to consider before you decide if Reddit is a stock worth buying.

#1 Priced Its Shares At US$34, Top Of Expected Range

Reddit raised nearly US$750 million in its IPO as the company priced shares at US$34 apiece, which was the top of its expected range of US$31-34.

The share sale at that price gave Reddit a fully diluted valuation (or market capitalisation) of US$6.4 billion.

Reddit shares are now trading under the ticker “RDDT” on the New York Stock Exchange. Additionally, it was the first IPO of a major social media company since the listing of Pinterest (NYSE: PINS) back in 2019.

Read Also: Ryde IPO: Singapore’s First Ride-Hailing Startup to List on the New York Stock Exchange (RYDE:NYSE)

#2 First-Day Share Price Pop Of 48%

Many investors buy into IPOs for speculative reasons. That’s because a lot of them will see large price reactions on the first day of trading as people hope to get into the stock early.

However, that’s not always a guarantee as many companies IPOs can see a fall in the first-day price. Yet Reddit’s IPO saw a strong positive price reaction on its first day of trading.

Indeed, Reddit shares ended their first day of trading with an increase of 48% as they closed trading at a price of US$50.44.

At the time of writing, the price closed at US$65.21 after five days of trading.

#3 Reddit Mainly Makes Money From Advertising

While it’s seen more as a collective forum for the exchange of topical discussions, Reddit’s business model relies on advertising.

In the company’s S-1 filing for its IPO, Reddit’s CEO Steve Huffman described advertising as the company’s first business, stating that:

“Advertisers of all sizes have discovered that Reddit is a great place to find high-intent customers that they aren’t able to reach elsewhere”.

Reddit is also looking to harness the power of machine learning in order to better match advertiser supply and demand as it scales the types, sizes and geographies of advertisers it aims to reach.

The company also said in its IPO filing that it’s in the early stages of allowing third parties to license access to search, analyse, and display both historical and real-time data from its platform.

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#4 Still Growing Its Daily User Base

It’s well known that Reddit has a hardcore following of daily users but that doesn’t mean it’s done growing its user base.

In fact, in its IPO filing, Reddit divulged its user numbers and declared that its primary metric of measuring its growing active user base is daily active unique (DAUq).

This is effectively a unique user that has accessed the Reddit website or app at least once during a 24-hour period.

Looking at this metric, Reddit has seen strong growth in its most recent quarter (q4 2023), with DAUqm growth of 27% year-on-year to 73.1 million worldwide.

Source: Reddit S-1 filing

The geographic split between DAUq that reside in the US and Rest of World is roughly 50:50 although the Total DAUq growth seen in the US in the latest quarter outpaced that seen in Rest of World.

#5 Was Loss Making In 2023

As with many other tech companies that go public, Reddit is still losing money. The company posted a net loss of US$91 million in 2023 while it posted revenue of US$804 million for the same period.

However, that compared to a loss of US$159 million on revenue of US$667 million in 2022, so Reddit is narrowing its losses.

The company is looking to tap into the potential growth of artificial intelligence (AI) as well. Reddit recently announced a deal with Alphabet Inc’s Google to enable Google’s AI products to leverage Reddit data.

Read Also: Guide To The Magnificent 7 Stocks And How They Performed In 2023

Offering A Social Media Growth Story

Reddit’s IPO has been the fourth-largest of any IPO on US exchanges so far in 2024 and its first-day performance is encouraging for those investors who think the 2022/2023 slump in IPOs is now behind us.

Longer term, Reddit investors will be hoping that the company can improve its business in order to generate consistent profits.

Reddit management appears to be looking towards advertising, along with machine learning and AI, to drive future growth in its user base as well as profits.

Only time will tell whether this niche social media platform can drive sustainable growth for its shareholders.

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