As Reddit's IPO approaches, independent equity research firm New Constructs is warning investors to avoid the social media platform's IPO.
“Reddit’s IPO represents the return of the junk IPO,” New Constructs CEO David Trainer wrote in a note. “We believe the company may never be able to monetize its platform without angering its users, and the whole premise of Reddit is user-generated content. This business model is inescapably built on a 22 dilemma: make money or please users.”
Reddit publicly filed a registration statement for its IPO last month, citing the opportunity to grow the platform, as well as its business, through advertising, monetization of commerce on the platform, and licensing data. “Advertising is our number one business, and advertisers of all sizes have discovered that Reddit is a great place to find high-intent customers they can't reach anywhere else,” Reddit co-founder and CEO Steve Huffman said in a press conference. 1 deposit. “Advertising on Reddit is evolving rapidly, and we are still in the early stages of growing this business.”
Related: Reddit publicly files IPO papers, detailing plans to license data, sell more advertising, and grow its “user economy.”
The stock will trade under the symbol RDDT on the New York Stock Exchange. It is expected to debut sometime in March, according to New Constructs Trainer. “While Reddit's expected $5 billion valuation is half its $10 billion private market valuation seen in 2021 when interest rates were zero and money was cheap, it is still very high,” he said in his note. “Reddit reminds us of the fast-growing but highly unprofitable IPOs we saw in 2021.”
He specifically pointed to DoorDash Inc.'s IPOs. DASH,
Robinhood Markets Hood Company,
Coinbase Global Inc. Coin,
Didi International Diy Company,
Rivian Automotive Company,
DoorDash shares are down 24.3% since the company's IPO in December 2020, while Robinood shares are down 52.8% since going public in July 2021. Coinbase shares are down 33% since their public debut in April 2021, while DiDi Global shares have suffered Slightly on its debut in June 2021 and has since fallen by 75.7%. Rivian stock is down 91.6% since its November 2021 IPO.
“A $5 billion valuation would suggest Reddit would grow its user base to 26 times current levels, which would be about 5 times the size of Snap (SNAP) — a highly unlikely feat,” Trainer wrote. “Reddit appears to be overvalued, and we think investors should pass on this IPO.”
Related: Reddit's IPO filing suggests WallStreetBets' popularity poses a risk to the stock price
The Wall Street Journal reports that Reddit is targeting a valuation of up to $6.5 billion.
Reddit is home to the WallStreetBets forum, which played a significant role in the 2021 stock meme craze that sent stocks like AMC Entertainment Holdings Inc. AMC,
and GameStop Corp.GME,
Progressive.
But new construction was not affected. “Sure, Reddit has created some of the most volatile meme stocks through its Wallstreetbets subreddit, but the company has never been profitable and should not be a publicly traded company,” Trainer wrote.
Read also: Reddit will offer IPO shares at issue price to 75,000 of its most active users: report
In its S-1 filing, Reddit cited WallStreetBets' popularity among retail investors as a risk to its stock price, which it said could face “extreme volatility” for reasons unrelated to the company's “underlying business, macroeconomic or industry fundamentals.”
In 2023, Reddit's revenue increased to $804 million, up from $666.7 million in 2022. The company's gross profit margin was 86% in 2023, up from 84% in 2022. Reddit had a net loss of $90.8 million at the end of In 2023, though, it shrank from $158.6 million in 2022.
The company had an average of 73.1 million daily active items in the three months ended December 31, 2023.
Related: Here's what we can expect to see from meme stocks in 2024
But Trainer highlighted the challenges associated with the platform's reliance on unpaid moderators. “This unique approach makes the Reddit experience more personal, but it's not without risks,” he wrote. “The supervisors are very important and can leave at any time.”
“The first social media company to go public in years will not only test investors’ appetite for the next money-loser, but also provide some clarity on the IPO market overall,” he wrote. “Let's hope investors don't throw caution to the wind and pile into the latest unprofitable company. Real diligence reveals that Reddit is not only unprofitable, but also highly overrated.
Reddit did not respond to a request for comment. Companies are not allowed to publicly comment on their IPOs before trading begins.
Andrew Kishner contributed.
