Reddit user u/k_ristovski delved into the social media platform’s initial public offering (IPO) prospectus, shedding light on key insights.
Here’s a breakdown of the potential opportunities and cautions investors need to have on their radar regarding the Reddit IPO.
Reddit’s revenue stream is heavily dependent on advertising, with a substantial 98% of its $804 million revenue in 2023 coming from this source. While the advertising model appears robust, assessing growth potential within and beyond the U.S. poses a challenge, particularly in light of Daily Active Uniques (DAUq) and Weekly Active Uniques (WAUq) metrics.
Data’s Role as a Strategic Asset
Looking ahead, Reddit’s data presents a valuable asset, as exemplified by its $60 million collaboration with tech giant Google, or Alphabet Inc. (GOOG GOOGL). The pivot towards data licensing could pave the way for a lucrative revenue stream, adding allure to the impending IPO.
Deciphering Reddit’s Profit Puzzle
Despite nearly two decades in the market, Reddit has yet to achieve profitability, consistently reporting annual losses hovering around $100 million. Coupled with substantial R&D expenditures, modest revenue growth, and a lofty valuation target exceeding $5 billion, investors face the critical task of evaluating the sustainability of Reddit’s existing business framework.
Related: Could Reddit’s Business Model Be a ‘Ticking Time Bomb’?
Unpacking Reddit’s Intent, Tactics, and Valuation
The impending IPO raises fundamental questions surrounding Reddit’s motivations. While the company possesses ample reserves to offset losses, the driving forces behind the IPO seem to revolve around providing liquidity for current stakeholders and enhancing executive compensation, notably for CEO Sam Altman. Altman, a key figure associated with OpenAI, wields significant voting authority within Reddit. The absence of transparency regarding any potential licensing agreement between OpenAI and Reddit raises notable concerns.
Moreover, the IPO strategy seems geared towards stimulating demand, highlighted by a focused share program targeting qualified Reddit users and moderators. This strategy may instill a sense of exclusivity, potentially inflating demand for the company’s shares.
When it comes to Reddit’s valuation, a blend of its advertising model and current financial reserves suggests a valuation in the vicinity of $3 billion. The overarching question lingers: Can the anticipated revenue influx from data licensing validate a valuation surpassing $5 billion?
Read Next: Reddit Lays the Groundwork for a Significant 2024 IPO, Aiming for a March Debut on NYSE
