Social media darling Reddit is set to make its debut on Wall Street later this week, but even if its initial public offering has a red-hot pop after it opens, some are holding out for bigger, better unicorns to file their paperwork before declaring that the IPO market is legitimately back.
Reddit is preparing to list its shares this week, but it might not be the first in the next wave of IPOs.
Reddit isn’t a bellwether, said Greg Martin, co-founder of Rainmaker Securities, a brokerage firm that specializes in private company investments. Martin notes that the company faces a lot of competition in social media and that its proposed valuation of $6.4 billion, based on the $34 a share top of its price range, seems like a “stretch”…even though it was valued at $10 billion in a private round of financing a few years ago.
Martin said that $5 billion makes more sense, adding that Reddit is likely to be as cyclical a stock as other midsize social media firms, such as Snapchat and Pinterest.
“It’s good that Reddit is going public. But it’s not the most exciting company. The growth has been more pedestrian lately and it’s an advertising revenue driven firm,” he said.
Reddit’s securities filings say revenue was up 21% in 2023, compared with a top line growth rate of nearly 40% in 2022. Reddit also isn’t profitable.
The company plans to list on the New York Stock Exchange under the ticker symbol “RDDT.” The price is expected to be set Wednesday evening, with shares due to trade on Thursday, according to reports.
There certainly could be strong demand for Reddit stock at the start, particularly from retail investors. The company is allocating some shares to Reddit users, just as Robinhood did three years ago with its users when the trading app went public. Reuters is reporting that the Reddit offering is heavily oversubscribed.
What’s more, Reddit does have many impressive backers. Condé Nast owner Advance Magazine Publishers owns nearly 30% of Reddit. OpenAI CEO Sam Altman has an 8.5% stake, while Chinese social media giant Tencent and mutual fund company Fidelity also have large positions.
But Martin said that once the hype over Reddit fades, investors will be waiting to see if larger unicorns look to file for IPOs later this year, such as payments firm Stripe, buy-now-pay-later company Klarna, software firms Databricks and ServiceTitan, and online banking fintech Chime.
Another potential concern about Reddit is competition. Investment firm Manhattan Venture Partners noted in a research report last month that Quora and other community-driven social media sites “have created intense competitive rivalry in this niche.” That will likely make it even tougher to keep attracting advertising dollars.
Along those lines, research firm Renaissance Capital pointed out that average revenue per user for Reddit dipped in the fourth quarter of 2023 compared with a year earlier. So even though Reddit is a well-known company with some buzzy investors, there are plenty of risks for investors. And the IPO may not lead to a full-blown comeback for unicorns on Wall Street just yet.
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