Reddit’s upcoming initial public offering (IPO) has generated a mix of excitement and caution among investors. Independent equity-research firm New Constructs is warning investors to avoid Reddit’s IPO, calling it a “junk stock IPO.” New Constructs CEO David Trainer argues that Reddit may struggle to monetize its platform without alienating its users, as the entire premise of Reddit is user-generated content. The company’s business model is built on a catch-22: either make money or please users.
In its S-1 filing, Reddit highlighted its plans to grow the platform and its business through advertising, monetizing commerce, and licensing data. Reddit’s co-founder and CEO, Steve Huffman, stated that advertising is their primary business and that advertisers have found Reddit to be a great place to reach high-intent customers. However, New Constructs remains skeptical, citing the recent track record of fast-growing but unprofitable IPOs such as DoorDash, Robinhood, Coinbase, DiDi Global, and Rivian Automotive.
Trainer points out that DoorDash shares have fallen 24.3% since its IPO in December 2020, while Robinhood’s stock has plummeted by 52.8% since its July 2021 public offering. Coinbase shares are down 33% since its April 2021 debut, and DiDi Global’s stock has fallen by 75.7% since its June 2021 IPO. Rivian’s stock has experienced the most significant decline, down 91.6% since its November 2021 IPO. Trainer argues that Reddit’s expected $5 billion valuation is too high, implying that the company would need to grow its user base to 26 times its current levels, which he deems highly unlikely.
The Wall Street Journal reports that Reddit is targeting a valuation of up to $6.5 billion. Reddit gained popularity through its WallStreetBets forum, which played a significant role in the meme-stock frenzy of 2021. However, Trainer remains unconvinced, emphasizing that Reddit has never been profitable and should not be a publicly traded company.
In its S-1 filing, Reddit acknowledges the risk posed by the popularity of WallStreetBets among retail investors, which could lead to extreme volatility in its stock price. However, it also highlights its revenue growth, with $804 million in 2023 compared to $666.7 million in 2022. Despite narrowing losses, the company still had a net loss of $90.8 million at the end of 2023.
Trainer raises concerns about Reddit’s reliance on unpaid moderators, who play a crucial role in the platform’s user experience. The unique approach of relying on unpaid moderators adds a level of personalization but also carries risks, as moderators can leave at any time.
Overall, New Constructs advises investors to steer clear of Reddit’s IPO. Trainer believes that the IPO will not only test investors’ appetite for money-losing operations but also provide insight into the overall IPO market. Caution is advised, as Reddit is not only unprofitable but also highly overvalued.
As of now, Reddit has not responded to requests for comment regarding its IPO. It is important to note that companies are not allowed to publicly comment on their IPOs before they start trading.
