Reddit IPO. Meme Stock Flying or Crashing in a Snap?

Reddit IPO. Meme Stock Flying or Crashing in a Snap?
 
Meta (Instagram, Facebook, WhatsApp) is one of the Magnificent 7 and has soared to all-time highs this year with a market cap of over $1.23 trillion. Reddit is listing publicly this week, on March 21, 2024, with a more modest $6.5 billion valuation. Does that make Reddit a great investment opportunity, particularly if you are a Reddit moderator who has been invited to participate in the Direct Share Program? Will Reddit rocket up like a 2021 meme stock, or will it sink like Snap, Inc., which has lost -85% of its value since its September 2021 high of $83.11/share? (Snap is now trading at $11/share, with a market value of $18.5 billion.)
 
Here are the things we will cover in this blog.
 
Reddit Relevance & Ranking
Will the Reddit IPO Shoot the Moon?
Beware of Investors Jumping Ship: Founders Get Rich or True Investor Opportunity?
Will the Reddit IPO Have a Crash Landing?
Dependent on Advertisers & Selling User Data
Cash Negative for 20 Years
 
And here is more information on each point.
 
Reddit Relevance & Ranking
Reddit has street cred among its users and "aspires to be the heart of the Internet." Meme stocks, including the GameStop phenomenon, were launched and fueled in the Wall Street Bets subReddit community. Will loyal users and moderators want to become shareowners? Are Redditors worried about losing the things they love most about Reddit to profiteers, once the company is publicly owned?
 
In terms of relevance, Reddit is not one of the more widely used social media platforms or apps, according to Comscore. In January 2024, Reddit ranked 31 in the Top 50 Multi-Platform Properties (Desktop, Mobile, and Social). Google, Microsoft, Yahoo, Comcast (NBCUniversal), Facebook, Amazon, Walt Disney, Paramount Plus, Raptive and Apple are in the Top 10, in that order. Bytedance (the owner of TikTok) ranked 21. Reddit scored more unique visitors than Netflix (#43) in January. Snap wasn't in the Top 50.
 
Reddit is not on the list of the Top 25 Smartphone Apps (source: Comscore). Youtube, Facebook, Gmail, Google Search, Google Maps, Amazon, Instagram, TikTok, Facebook Messenger and Google Play are the Top 10 Smartphone Apps. Snapchat is 21. Spotify is 11. 
 
Will the Reddit IPO Shoot the Moon?
I perused some of the conversations on Reddit that are talking about the IPO. What I found was a lot of skepticism. Many of the commentators assumed it was just a way for the insiders to take the money and run, and speculated that once the website was beholden to quarterly earnings reports many of the free options they like would become premium features. On the popular WallStreetBets subreddit, most of the posts discussed shorting the stock. The few bullish commentators admitted that their opinions were unpopular.
 
Users were also concerned about having their data sold. Although Reddit is currently heavily reliant upon advertising revenue, the company wants to expand into data licensing. According to the Reddit S-1 filing, Reddit expects “our growing data advantage and intellectual property to continue to be a key element in the training of future LLMs.” Artificial intelligence is hot on Wall Street, so it’s a smart move to position the company as providing important data to the giants in that space, like Nvidia. If Reddit becomes a player in artificial intelligence, the company could become more exciting. Of course, every social media company lays this claim, and many of them have a lot more traffic and users.
 
Beware of Investors Jumping Ship: Founders Get Rich or Investor Opportunity?
Reddit has been around for about 20 years and has never turned a profit. The net loss was lower in 2023 than in 2022, at $(90.8) million versus $(158.6) million in 2022. However, most of the cash-bleed curtailment was due to high interest rates, and the ability to earn some income on their marketable securities. You can bet that the VCs, founders and executives are chomping at the bit to turn some of their paper wealth into hard cash. According to the S-1 filing, the lockup period for insiders ends on the 3rd trading day after Reddit files their June 30, 2024 earnings report, or on August 22, 2024, whichever occurs first.
 
Whatever happens on March 21, 2024, which is the first day of trading, late August should be a very active time for the Reddit stock. While VCs and insiders became billionaires by holding shares of the Facebook and Google IPOs, more recent unicorns have had trouble flying, including Snap, Inc., Lyft Inc., Robinhood and WeWork. We Co’s IPO crashed and burned in August of 2019. The company declared bankruptcy on Nov. 6, 2023. Snap has held on as a company, but is trading -35% under its IPO price of $17/share.
 

Snap Inc. launched Spectacles right before their IPO. Reddit is making a play for selling user data to artificial intelligence companies. Is this a good story or a real opportunity?

 
​Will Reddit Crash Land?
The recent history of the IPOs of unicorns and technology/communications companies doesn’t
augur well for Reddit. However, even though the meme stock mania is more humble these days, there is no free money being deposited into our accounts that we can play with, and the Crypto Winter has only recently defrosted, we’ve still seen euphoric buying in the Magnificent 7. Most of those companies have more than doubled in share price over the past year. According to Howard Silverblatt, the senior index analyst of the S&P500, "Nvidia, Microsoft, Meta Platforms and Amazon.com account for 60% of the year-to-date 7.28% return [of the S&P500] (with Nvidia accounting for 32%)."
 
Reddit’s future might depend on its ability to sell its users’ data to artificial intelligence companies – a space that is currently the hottest story on Wall Street. So, even though Redditors aren’t very enthusiastic about the IPO at this time, if there is an exciting earnings report in Reddit’s near future, particularly if there is a jump in AI data licensing, the game could change quickly. If it happens before the insider lockup period ends, we could see the executives and VCs holding rather than selling, as Main Street investors pile in on the good news. If after, there could be a lot of volatility in 2024. There are a lot of if’s that will be resolved over the coming months.
 
Dependent on Advertisers & Selling Data 
Positioning Reddit data for artificial intelligence learning is a relatively new venture for Reddit. Currently, most of the revenue is still tied to advertising. According to WARC Media, global advertising spend should increase 8.2% in 2024, to surpass a trillion dollars, with advertisers favoring digital platforms, such as Alpha, Meta, Amazon and Reddit. Political advertising will be rampant in 2024’s Presidential election. In 2023, Reddit’s revenue increased almost 25% over 2022, to $804 million from $667 million in 2022.

During times of economic slowdowns, advertising is the canary in the coal mine, with ad spend getting chopped dramatically. Most analysts are predicting a soft landing with no recession in 2024. However, economic data is finicky. As an example, we thought we had beaten inflation, only to see the Consumer Price Index kick up to 3.2% year over year in February 2024.

Cash Negative for 20 Years
Meta is profitable. Weibo, the Twitter of China, is profitable. Snap Inc. has been cash negative since inception, as has Reddit. Small companies have more difficulty borrowing money, particularly if they haven’t found their pathway to profitability.
 
Reddit’s current cash position is sound, with over $1.2 billion in cash and marketable securities. As I mentioned above, one of the biggest reasons that Reddit’s net loss was lower in 2023, was the return that they were able to make on their marketable securities. If interest rates get cut later this year, so will Reddit’s ability to earn a decent yield. If the company goes back to the 2022 cash burn rate, they cut their runway to profitability and could be flying too close to the trees. Investors will be looking at the bottom line, as much as the top line growth, over the next few earnings reports.
 
Bottom Line
Small caps have been punished by Wall Street of late, particularly cash negative companies. Insider liquidity events designed as IPOs have had a hard time getting off the ground over the past decade. The Reddit IPO doesn’t have the meme stock momentum that its platform stirred up for AMC and GameStop during the pandemic stimmy check anomaly. I would not be surprised if the projected Reddit share price of $31-$34 a share takes a nose dive after the IPO. The future of the company’s share price and valuation could be linked with AI and selling user data – something that their community might push back on. We’ll know more in the coming months – particularly in late August, when the company files their June 2024 earnings report and the insiders are freed up to sell.



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