Does Reddit Represent the Return of the Junk Stock IPO?

An article in Inc notes a 'wild projection' in Reddit's SEC filing that Reddit's global market opportunity by 2027 is $1.4 trillion.'
Some of the numbers lead back to a single individual: Sam Altman. The co-founder and chief executive of ChatGPT-maker OpenAI owns an 8.7 percent stake in Reddit, more than its co-founder and CEO, Steve Huffman, who owns 3.3 percent... Altman, through various funds and holding companies he owns or manages, controls more than a million shares of Reddit at $60 million in aggregate purchase price — and holds more than 9 percent of voting rights...
Discussing Reddit's future, financial analyst and journalist Herb Greenberg recently told CNBC, 'This is an AI play.'


But the senior investing editor for Kiplinger.com argues that retail investors 'may want to hold tight before rushing out to buy the Reddit IPO.'
While IPO stocks tend to have strong first-day showings, returns for the first year are generally weak, says the team of analysts at Trivariate Research, a market research firm based in New York. And since 2020, 'the average IPO has lagged its industry average by 30% over the subsequent three years following its first closing price...'

Other commenters have noted that Reddit's allotment of shares to select Redditors could lower demand on the first day of trading, which would work against any IPO pop.

'Over the past few years, there have been a bunch of IPOs in the U.S. in which overhyped names enjoyed flashy stock-market debuts only to drop sharply soon after,' notes the Street.
Notable examples include Coinbase, which plummeted by almost 90% after its debut, Robinhood, still down 53% since its IPO, and Rivian, down over 91% since its debut. However, it's crucial to note that all of these IPOs occurred in 2021 amid market euphoria fueled by low interest rates, significant economic stimulus, and the lingering effects of the Covid-19 pandemic. Although the current macroeconomic landscape differs from three years ago, valuations of tech and growth stocks remain stretched.

Kiplingers.com concludes it 'boils down to your own personal investing goals and risk tolerance. If you do decide to buy Reddit stock when it first begins trading, do so in a small amount that you can afford to lose.'

But they also cite analysis from David Trainer, CEO of New Constructs, a research firm powered by artificial intelligence. 'Reddit's IPO marks the return of the junk IPO,' Trainer wrote in Forbes. '[The valuation] implies that Reddit will grow its user base to 26 times current levels, which would be nearly five times the size of [Snapchat-maker] Snap, and a highly unlikely feat. Reddit looks overvalued, and we think investors should pass on this IPO.'
Trainer writes:
[T]he company has never been profitable and should not be a publicly traded company... I think the company may never monetize its platform without angering its users and the entire premise of Reddit is user-generated content. This business model is inescapably built on a catch-22: make money or please users... Reddit looks overvalued, and I think investors should pass on this IPO.

Buyers and analysts told the site Marketing Brew 'that they see the platform as nice-to-have, but that it is not an essential part of their media plans, like Meta or Google are.'

'They've always been solidly in the second or third tier of social networks,' alongside Snap, Pinterest, and X, Brian Wieser, a former GroupM exec who's now author of the industry newsletter Madison and Wall, told Marketing Brew.

Yet Trainer notes that '98% of Reddit's revenue in 2023 came from third-party advertising on the site and 28% of all revenue came from ten customers,' and 'Reddit's cost of revenue, sales & marketing, general & administrative, and research & development costs were 117% of revenue in 2023.'

Trainer concludes 'Reddit is nowhere near breakeven. Reddit is an unprofitable social media company fighting for users.'

Bloomberg adds that the subreddit r/WallStreetBets 'has threatened to bet against the stock, with many people noting that the company still loses money two decades into its existence. (Reddit lost $90.8 million last year, down from $158.6 million the year before.)'

Some have complained that the invitation to invest fails to make up for the unpaid labor they've invested making the site work... In 2021 the platform's WallStreetBets forum ignited a meme-stock frenzy, propelling skyward the stocks of nostalgic but struggling companies like GameStop Corp. and AMC Entertainment Holdings Inc. and sending shockwaves through the financial industry... When it goes public, the platform that invented meme stocks runs the risk of becoming one itself.

Reddit noted the possibility as a risk in its IPO filing. 'Given the broad awareness and brand recognition of Reddit, including as a result of the popularity of r/wallstreetbets among retail investors,' the company warned that its stock could 'experience extreme volatility... which could cause you to lose all or part of your investment if you are unable to sell your shares at or above the initial offering price.'
Users on WallStreetBets got a kick out of the fact that the company listed the forum as a risk factor, posting about it with a sly smiling emoji...

Meanwhile, reports that marketers are infiltrating subreddits have been confirmed. Over 200 businesses have 'integrated Reddit Pro into their digital strategies,' reports Search Engine Land, including 'well-known names such as Taco Bell, the NFL, and The Wall Street Journal...
'During the initial alpha testing phase with approximately 20 businesses, Reddit reported its Pro partners, on average, generated 11 additional posts and comments per month.'

Read more of this story at Slashdot.