Reddit goes public: should you buy shares?

Reddit is gearing up for its initial public offering (IPO), aiming to raise $519 million and achieve a valuation of around $6.5 billion. Should you buy stock? Here's everything we know so far.

Reddit is making significant strides as it prepares for its highly anticipated initial public offering (IPO), with the goal of securing $519 million and attaining a valuation of approximately $6.5 billion. The comprehensive plan encompasses the offering of 15 million shares, each priced between $31 and $34, leading to the company's listing on the New York Stock Exchange under the distinguished symbol "RDDT."

In 2021, Reddit's first attempt at going public faced challenges, but it's making a comeback amid the buzz around generative AI. After changing its API access terms, many third-party developers found them unworkable, resulting in app closures. This sparked widespread protests and significant changes in some of Reddit's major communities.

What distinguishes this IPO is Reddit's innovative decision to involve its expansive user base in the offering. A noteworthy 1.76 million shares, constituting 8% of the total, have been earmarked for Reddit's users and moderators through a directed share program. This exclusive initiative enables eligible individuals to acquire shares at the IPO price before the public offering, contingent on their contributions to the platform gauged by "karma" points, account creation date, and moderation activities.

"Our users have a deep sense of ownership over the communities they create on Reddit. We want this sense of ownership to be reflected in real ownership — for our users to be our owners," co-founder and CEO Steve Huffman said. "Becoming a public company makes this possible."

The impetus behind Reddit's transition to a publicly traded entity is primarily fueled by the imperative to secure funds for operational needs and to explore promising avenues for expansion. The proceeds from the IPO are earmarked for diverse corporate objectives, encompassing licensing, strategic acquisitions, and investments in cutting-edge technologies or intellectual property.

In terms of financial performance, Reddit reported a robust $804 million in revenue for the fiscal year 2023, marking a substantial 20% increase from the preceding year. Additionally, the platform showcased a narrower net loss of $90.8 million compared to the figures reported in 2022. Notably, Reddit boasts an impressive user base, with over 73 million daily active users recorded as of the conclusion of 2023.

Reddit's IPO strategy, particularly its inclusive approach involving users and moderators, serves as a testament to the company's commitment to a community-driven ethos. Nevertheless, this strategy does introduce potential risks, notably heightened market price volatility, stemming from the participation of individual retail investors inclined to expediently sell their acquired shares. 

Investors and market observers are closely scrutinizing Reddit's IPO, recognizing it as the inaugural major tech debut of the year and the first social media IPO since Pinterest's public offering in 2019. The outcome is poised to function as a barometer for the broader IPO market, currently experiencing a sluggish phase, and could provide insights into investor appetite for shares in the dynamic but often volatile realm of unprofitable tech companies.