Reddit finally goes public today, March 21 on the NYSE under the ticker symbol RDDT. As Reddit prepares to offer its shares to the public following years of speculation and rumors, the sentiments of some site users and investors could not be more opposed.
The top comment in an /r/investing thread[1] with over 600 upvotes by user “carsonthecarsinogen” claims to have not seen “a single bullish argument” for Reddit’s IPO. Another highly-upvoted comment states that the IPO will be “a dumpster fire.” The first comment I can find by a user claiming that they will actually participate in the IPO has only 10 upvotes, far down the page under a dozen comment threads filled with mostly negative sentiment.
CNBC reported that “Reddit Power Users Balk at Chance to Participate in IPO as Wall Street Debut Nears”[2], referring to the “Directed Share Program” setting aside 8% of pre-IPO shares mostly for Reddit users and moderators who have contributed to the site over the years, as well as family and friends of employees. The DSP has different priority tiers depending on how much karma a user has amassed or how many moderator actions they have performed. Perhaps The Verge was most succinct in summarizing user sentiment with an article titled, “A Lot of Redditors Hate the Reddit IPO.”[3]
But, Redditors don’t have to buy — or like — the Reddit IPO for it to be successful (at least initially). In an exclusive story citing confidential sources, Reuters claims the Reddit IPO is “currently between four and five times oversubscribed,”[4] indicating that there are that many times more applications to purchase shares of RDDT than exist, which could be a bullish signal for Reddit’s initial trading.
However, this could simply be investors who are interested in investing in any IPO, not specifically Reddit, and playing the numbers for an “IPO pop.” Data from the Nasdaq exchange of companies’ initial listings between 2008—2020 show that only 31% of IPOs declined in price on their first trading day.[5] Statistically, swing trading an IPO for its first day on the market has historically been a winning proposition on average. We don’t know what percentage of investors who have subscribed to the Reddit IPO are just looking to try and get allocated some shares in the hopes of making a quick buck off day one price action, and who otherwise have no interest in the company’s prospects as a long-term investment.
Reddit’s Form S-1 filed with the US Securities and Exchange Commission[6] is the primary source for all information related to their IPO. From it, we can determine that Reddit is offering 22 million shares to the public. About 2/3 of these shares (15,276,527 to be precise) are being sold by Reddit, Inc. and another 6,723,473 shares are coming from existing shareholders.
Of those selling stockholders, it’s clear that Reddit CEO Steve Huffman and COO Jen Wong are the biggest individual beneficiaries. Huffman will sell 500,000 shares, and Wong will sell 514,000 shares. At the top of the expected IPO price range of $31–34 per share, this would be $17 million for Huffman, a nice paycheck nineteen years after he co-founded Reddit. Huffman is cashing out 10.7% of his stake in Reddit, and Wong 24.2% of her stake. Huffman directly retains just 3.3% of voting power in the company that he co-founded nearly two decades ago.
Interestingly, none of the entities or individuals identified in the S-1 as owning more than 5% of Reddit (a mandatory disclosure threshold to the SEC and the public) are offering any shares for sale. These include Advance Magazine Publishers Inc. (the parent company of Condé Nast, which purchased Reddit in 2006), FMR LLC, entities affiliated with Quiet Capital and Tacit Capital, entities affiliated with Sam Altman (CEO of OpenAI), entities associated with Tencent, and entities associated with Vy Capital. This makes some sense as many of these entities acquired shares in Reddit’s 2021 Series E and Series F filings for $42.47 per share and $61.79 per share respectively, therefore selling at the IPO price would mean realizing a loss on this investment.
There will potentially be 189,109,905 shares of RDDT outstanding, if the underwriters exercise their over-allotment option in full, and including issuable stock options and RSUs. (Many articles claim 188.7 million shares, which I cannot replicate and seems like a copy and paste error from some initial outlet that forgot to add in the unissued RSUs — modern journalism sure is impressive.) At the top of the $34 per share IPO range, Reddit would thus have a valuation of over $6.4 billion. This would currently put it in 826th position among American companies when ranked by market capitalization[7], hanging out between Post Holdings (the cereal company) and Choice Hotels International.
A $6.4 billion market cap is a significant downgrade from Reddit’s estimated $10 billion post-money valuation in the August 2021 private fundraising round led by Fidelity Management[8]. In fact we first saw Reddit submit for a confidential IPO with the SEC in December 2021, likely riding high on their Series F valuation, but the IPO obviously did not happen until now. It’s probable that Reddit got skittish due to the widespread talk of a recession and general decline of around 25% in the S&P 500 between January and October of 2022. With major market indices now back at all-time highs, investors are clearly optimistic about the US economy once again, providing a more comfortable environment for a speculative technology firm to go public in.
I asserted in You Should Quit Reddit that Reddit’s value generated per user in 2020 was among the lowest of any social media platforms. And it reflects on their valuation, despite being one of the most-visited websites in the world. As of today, Meta (NASDAQ: META) has a valuation of $1.28 trillion. Twitter/X although now privately owned by Elon Musk was valued at $12.5 billion by major shareholder Fidelity just a few months ago.[9] Snapchat (NYSE:SNAP) has a valuation of $18.39 billion. Hell, Pinterest (NYSE: PINS) has a valuation of $23.07 billion.
Globally, Reddit’s annual Average Revenue Per User (ARPU) was $12.31 in 2023, $11.65 in 2022, and $8.98 in 2021 as they revealed in their S-1 filing. My estimate for 2020 based on the little public data Reddit released was $2.67, so perhaps this was a bit low, but then again the Q1 2021 data they released was a quarterly ARPU of $1.44 per user, the lowest by far in the three years of data shown in this filing, and it’s possible that most or all of the quarters in 2020 were lower than this.
Of the major social media companies only Pinterest is worse at monetizing their users than Reddit; in 2023 Pinterest’s global annual ARPU was $6.46.[10] Pinterest claimed 498 million monthly active users in Q4 2023, whereas Reddit claimed 73.1 million daily active uniques and 267.5 million weekly active uniques in their S-1 filing. Pinterest lost $35 million in 2023, and only once made an annual profit in 2021. PINS is down over 60% from its all-time-high in 2021.
We also learn from the filing that Reddit has still never made an annual profit in nearly 2 decades of existence, although their net losses do appear to be decreasing. In 2022, Reddit lost a total of $158.5 million; in 2023 their losses declined to $87 million. Additionally, it was recently announced in February 2024 that Reddit has entered into a $60 million per year deal with Google to sell user comment data for the purposes of Artificial Intelligence model training,[11] which would get them most of the way towards net zero profit for 2024. If they’re able to grow their advertising income just a little bit on top of this, it’s conceivable that Reddit could report their first annual profit in 2024. To achieve a price-to-earnings ratio of 50, which is still quite high but reasonable for a growing technology company, Reddit would need to make an annual profit of $128 million at a per-share price of $34.
So at the very least, I’d conclude that Reddit is a less worse investment than Pinterest. It could even signal that Reddit is undervalued, relative to what market participants are willing to pay for a non-profitable social media company that primarily makes money on serving advertisements to users.
In pre-market trading on IPO day, we indeed see that Reddit has targeted the top of their IPO range and will be opening at $34 per share:
Cashing in and selling out on authenticity
Some variation of the word “authentic” appears 39 times in Reddit’s SEC S-1 filing. For example, “Reddit content provides authentic, human perspectives across almost any topic imaginable.”
I wrote in Chapter 22 of You Should Quit Reddit on continuing to use the site for the few places it still provides value, such as a crowdsourcing tool for product reviews and opinions, and technical troubleshooting. Several readers sent me emails reporting that they had stopped browsing Reddit completely, only occasionally navigating in via a search engine when the Reddit page appeared to be the only result that contained a discussion between actual humans.
Taking advantage of that presumed authenticity provides ripe opportunities for many different actors, be they profit-seeking individuals, motivated nation states, or simply trolls looking to get their kicks in. Anyone who has played with OpenAI’s GPT models has seen how quickly LLM’s are improving over time, and although text generated by the models often has certain “tells” to those who are familiar with it, it’s not hard to imagine their output becoming indistinguishable from most human-generated text in the near future.
Reddit’s deal with Google to sell user-generated text for AI training has an ironic undertone in that the goal of improving AI directly degrades authenticity on Reddit. I postulate that in the short-term this income stream will decline to zero — Reddit will be flooded with increasing volumes of AI-generated content, and as the two become increasingly indistinguishable it will become more computationally intensive and eventually impossible to filter down to solely human-generated content.
The income stream of selling user-generated data was only made available by Reddit restricting their API with the changes that went into effect on June 30, 2023. Companies like OpenAI had already made off with a bunch of Reddit data to train their models on under the previously free and open Reddit API policy. At the time, Redditors launched their failed “protest” primarily motivated by losing out on their 3rd party smartphone applications (many of which were forced to shut down due to claims that Reddit’s API pricing was prohibitive). It’s clear that Reddit, Inc. was able to kill two birds with one stone in that move. The “protest” was quantitatively a complete failure anyway; Reddit’s ARPU rose each quarter in 2023. Clearly, an insignificant number of users actually ended up quitting the site.
Beyond AI, it seems more and more humans are attempting to use Reddit to turn a profit. Here’s a screenshot I took a few weeks ago of the top result after Googling “best grill reddit”:
We see that the original post was made over one year ago, however a red flag is that the top comment is only 11 days old. Cleverly, the user doesn’t directly drop an affiliate link to Amazon (which are quite easily identified by Reddit’s AutoModerator), but links to a LinkedIn blog review which hosts the Amazon affiliate link. Nobody is hanging out in an over one year old Reddit thread and voting on comments, so that user clearly controls many bots, or purchased upvotes from an upvote seller to ensure that their comment ended up on top. A non-critical reader would be funneled from a search engine right to that user’s affiliate link page, and potentially purchase the product due to manufactured consensus.
I looked for Reddit threads ranking highly in Google search results for several other products out of curiosity and a good portion of them contained similar behavior by affiliate marketers. They are cashing in on the presumed authenticity of Reddit threads in search results, and undermining it in the process. Reddit’s inability (or disinterest) to detect and prevent behavior like this does not bode well for the company keeping its reputation of hosting authentic discussions, which it clearly identifies as a core aspect of its appeal in the S-1 filing.
On March 8, Reddit also unveiled a new suite of tools for businesses advertising on Reddit, called Reddit Pro. It’s described as “a free suite of tools for businesses to also establish and grow a meaningful organic presence on Reddit. These tools will transform the way businesses engage on our platform, and in turn, connect people with the businesses they are most interested in.”[12] The tool suite is further described as containing AI-driven (there’s the buzzword) insights that will help businesses find content relevant to their specific category, as well as allow specific brands to see where they’re mentioned on the platform.
Reddit Pro is still in beta, but I’m imagining that if a user mentions Doritos in a comment, a Frito-Lay controlled account would get a ping to engage with the content. My gut feeling is that Reddit Pro will increase the visibility of big brands especially in comment sections, and the eventual pricing will determine whether smaller brands see it as a worthwhile expenditure or will continue astroturfing on the platform.
If you thought Reddit was done selling out leading up to the IPO, here’s a whopper: “Free Form Ads” were announced on March 14, billed as letting advertisers “advertise like a Redditor.” The new ad type will allow combining multiple media types such as text, image, and video. “As our most native ad format yet, free-form ads are designed to look and feel similar to the type of content Redditors share with each other, inviting maximum engagement from the community.”[13]
I wrote in my book how Reddit’s 2018 redesign was done primarily with the focus of increasing advertising revenue, by increasing the number of ads that users would encounter, as well as making the advertisements look more like content created by genuine users. There’s nothing to extrapolate here with Free Form Ads; Reddit, Inc. comes right out and says they’re designed to blend in with user-created content more than ever before. Reddit boasts their results from early testing: “we’ve seen free-form ads outperform all other ad types in average click through rate (CTR) by 28%, as well as increased community engagement when comments are enabled.”
I’m curious whether these new ads will be on old Reddit, or only served to new Reddit users. I’m not hanging out on Reddit to find out, so if any readers see a Free Form Ad, please email a link to it my way.
From a business perspective, these are some big announcements from Reddit that could be the boost in advertisement revenue they need to get over the threshold of profitability in 2024. But as already pointed out, there’s a potential downside here in that Reddit is further selling out its reputation for authentic discussion by increasing the penetration and integration of advertisements into users’ feeds. Perhaps they’re confident in the addictiveness of their product. After all, Reddit has the backend metrics to point to what an utter failure the API change protests were. If most users didn’t go anywhere after staging a principled stand against the site, chances are they’ll stick around when there’s a couple more ads in their feed.
Will I be shorting RDDT?
I’m a boring, straightforward index fund investor and I almost never dabble in investing in individual companies. Given all the research and thought about Reddit I’ve done, I feel like I have a decent amount of knowledge about the company which at least warrants a look.
I will say that naked shorting is incredibly foolish and probably shouldn’t be done by most retail investors. If the stock doubles in price, your position is liquidated. If the stock goes to zero, you double the money you bet on it. It’s really just a terrible deal when one considers how much capital they’d need to risk in order to make an impactful profit from a stock declining.
In the near future I would consider some put options on Reddit, especially if the stock price climbs substantially following the IPO and volatility dies down. However, I do think 2024 is going to be a good year for Reddit, Inc. financially, and it shouldn’t be underestimated how much a tech darling stock might rally once it has passed the bar of no longer bleeding money on an annual basis.
My big takeaway here is that it doesn’t matter if I personally think Reddit sucks and hosts little more than shallow entertainment, ragebait, and argumentative misanthropes. Clearly, more people than ever before are still using the site. It wouldn’t be the first example of a company that makes a profit on a product that is detrimental to its consumers.
A reader named Greg wrote in to tell me that he found my book after being driven to his wit’s end by seeing what looked like GPT-generated stories getting to the front page of Reddit on a daily basis. Greg writes in part, “It seemed like someone was prompting ChatGPT to write them a story from the perspective of a Redditor experiencing cheating in their relationship and users were eating them up. I was being driven insane by being the only sane person exclaiming at my monitor that the story was fake while seeing thousands of people collectively waste hundreds of hours of their life typing providing the OP advice and dishing out judgement as if it were real.”
As distasteful as I find this current state of Reddit and the World Wide Web in general, it may signal that there is indeed a market of hundreds of millions of people who will happily spend their hours engaging with a saccharine, repetitive, AI-generated hellhole filled to the brim with ads.
“Reddit Is Offering Redditors the Chance to Purchase Stock at the Same Price as Institutional Investors When They IPO. Is There Any Chance This Is a Good Investment?” Reddit, old.reddit.com/r/investing/comments/1b0n2eo/reddit_is_offering_redditors_the_chance_to/. ↩︎
Vanian, Jonathan. “Reddit Power Users Balk at Chance to Participate in IPO as Wall Street Debut Nears.” CNBC, CNBC, 20 Mar. 2024, www.cnbc.com/2024/03/20/reddit-power-users-balk-at-chance-to-participate-in-ipo-as-debut-nears.html. ↩︎
Lopatto, Elizabeth. “A Lot of Redditors Hate the Reddit IPO.” The Verge, 24 Feb. 2024, www.theverge.com/2024/2/24/24081441/reddit-shares-redditor-ipo-user-risk. ↩︎
Wang, Echo. “Exclusive: Reddit’s IPO as Much as Five Times Oversubscribed, Sources Say.” Reuters, 17 Mar. 2024, www.reuters.com/markets/deals/reddits-ipo-much-five-times-oversubscribed-sources-say-2024-03-17/. ↩︎
Mackintosh, Phil. “Trends in IPO Pops.” Nasdaq, 4 Mar. 2021, www.nasdaq.com/articles/trends-in-ipo-pops-2021-03-04. ↩︎
Reddit, Inc (2024). Unites States Securities and Exchange Commission Form S-1, Amendment 3. Retrieved from Securities and Exchange Commission website: https://www.sec.gov/Archives/edgar/data/1713445/000162828024011789/reddit-sx1a3.htm#i1b9a579e78a34dfa99f7f26daeec195b_106. ↩︎
“Largest American Companies by Market Capitalization.” CompaniesMarketCap.Com, companiesmarketcap.com/usa/largest-companies-in-the-usa-by-market-cap/. ↩︎
“Series F – Reddit – 2021-08-12.” Crunchbase, https://www.crunchbase.com/funding_round/reddit-series-f–1adb717d. ↩︎
Brodkin, Jon. “Since Elon Musk’s Twitter Purchase, Firm Reportedly Lost 72% of Its Value.” Ars Technica, 2 Jan. 2024, arstechnica.com/tech-policy/2024/01/since-elon-musks-twitter-purchase-firm-reportedly-lost-72-of-its-value/. ↩︎
“Pinterest Announces Fourth Quarter and Full Year 2023 Results.” Pinterest — Investor Relations, s23.q4cdn.com/958601754/files/doc_earnings/2023/q4/earnings-result/Q423-PressRelease.pdf. ↩︎
Tong, Anna, et al. “Exclusive: Reddit in AI Content Licensing Deal with Google | Reuters.” Reuters, 21 Feb. 2024, www.reuters.com/technology/reddit-ai-content-licensing-deal-with-google-sources-say-2024-02-22/. ↩︎
“Introducing the New Toolkit for Business Growth: Reddit Pro Is Here.” Reddit, Inc., 8 Mar. 2024, www.redditinc.com/blog/introducing-the-new-toolkit-for-business-growth-reddit-pro-is-here. ↩︎
“Advertise like a Redditor with Our All-New, Completely Unique Ad Format: Free-Form Ads.” Reddit, Inc., 14 Mar. 2024, www.redditinc.com/blog/advertise-like-a-redditor-with-our-all-new-completely-unique-ad-format-free-form-ads. ↩︎