At long last, Reddit may finally be going public. According to Bloomberg, Reddit has begun talks with investors about a potential IPO in early 2024. Some of you might remember Reddit’s initial plans to file for an IPO in 2021.
Reddit ultimately decided against IPOing at the time due to the pandemic and the burst of the IPO market bubble. Companies were no longer able to maintain their sky-high IPO valuations as investors demanded real growth making 2022 an especially bad year for IPOs. In fact, it was the worst year in a decade with only $7.7 billion raised.
But Reddit’s renewed interest and plans to try again in 2024 could signal a thawing of the IPO market. Now investors are wondering whether Reddit will go through with it this time, and if it does, is it worth grabbing some Reddit shares after the IPO?
Why Will Reddit IPO in 2024?
It seems that market conditions have changed, and investors are once again willing to take a chance on IPOs after 2022’s disappointing performance.
As for last year, 2023 was similiarly haunted by poor IPOs. Instacart was one such example after the company IPO’ed at a valuation of $9.9 billion despite reaching a valuation of $39 billion in 2021. Even after its public listing, Instacart (NASDAQ: CART) struggled to stay at $30 per share and is currently trading around $25.
However, the outlook for IPO’s might be improving in 2024. This change of heart is mainly due to expectation that interest rates will decrease, which will lead to more investment and higher share prices.
Luckily, the Shein IPO – if it goes through – could offer investors a window into the outlook for 2024’s IPO market. If the IPO goes well, it could signal that the market is ready to give IPOs another chance. Of course, this doesn’t necessarily mean that Reddit’s IPO will achieve the same results. But it will give Reddit’s management team the opportunity to see one company testing the waters before it takes the plunge.
That is of course, if Shein IPO’s before Reddit. According to new information, Reddit could be considering an IPO as soon as March 2024.
Reddit’s Valuation
While Reddit was initially aiming for a valuation of $15 billion, the same as its valuation in 2021, it appears that their dreams were quickly cut short.
Perhaps it was inevitable since Reddit’s primary investor, Fidelity, cut the valuation of its shares by 45.4% since its investment in 2021. Fidelity’s decision not only illustrates how valuations are being brought back to Earth, but also how Reddit was forced to face facts about its potential IPO.
According to Bloomberg, Reddit is considering a valuation of at least $5 billion. This is a far cry from $15 billion, but could be a move that prioritizes the company’s long-term success over a flashy IPO.
It would reflect poorly on the company if the offering price is too high, and the stock drops quickly after its IPO. On the other hand, too low a price could fail to instill confidence in investors – possibly even raising concerns that there are issues at the company.
Its worth noting that the private trades of unlisted Reddit shares currently value the company between $4.5 and $4.8 billion. Since private shares are relatively illiquid, it is not necessarily indicative of the value Reddit could reach on its IPO. Overall, Reddit’s decision to target a much lower valuation ties into its other plans to make itself more attractive to investors.
Identity Crisis
Over the past few year or so, Reddit has looked for new ways to boost revenues with mixed results.
In July, Reddit imposed data rate limits on the free access tier of its application programming interface (API). This tool enabled users to use an alternative to the Reddit app to browse Reddit. Since ads are Reddit’s main source of revenue, this move was meant to increase revenue. However, users did not appreciate the change at all.
In protest, moderator teams across Reddit went dark, shutting down major subreddits that together reached millions. It was a bold show of dissent that threatened to upend the very foundation of the site. But management wasn’t backing down that easily.
Reddit’s management responded by issuing an ultimatum to the mutinous mods: flip the switch or face removal. Those who kept their communities closed would be removed if they did not comply.
This episode is important because it exposed Reddit’s growing identity crisis. On the one hand, Reddit has positioned itself as a user-led community, but on the other, management needs to present the best picture of growth in terms of both revenue and users for its IPO. If Reddit’s goals of becoming a public company put it at odds with its users, the company could suffer a rebellion within the platform.
This episode also showed that Reddit’s moderators have significant power since they could migrate their communities from Reddit to Discord if they decide to fight with Reddit’s management. Since this migration strengthens Reddit’s competitor at its own expense, it is definitely the least favorable option for Reddit’s management.
While this move was important to combating the rise of AI models being trained using its data for free, it has also highlighted some significant cracks in Reddit’s foundation. And unfortunately, glossing over these issues with a timely rebrand was likely not enough to soothe investors’ concerns.
This incident has led some to wonder what would happen to the Reddit community after going public, since Reddit’s management will be uniquely tied to the interests of its shareholders and the performance of its stock price.
Layoffs
While Reddit fights to maximize revenue by limiting who can access its data for free, it is also looking for cost-cutting opportunities. In June, it announced that it would lay off 5% of its global workforce, amounting to a reduction of about 90 people since Reddit had about 2,000 employees globally. The company has also cut its future hiring plans.
As Elon Musk’s takeover of Twitter illustrated, there are often opportunities to cut the fat in the social media sector. In 2021, Twitter had 7,500 employees, but at the start of 2023, that number had dropped to around 1,300. Yet the platform has worked the same overall. With innovations in AI, it seems likely that these layoffs are just part of a concerted effort to reduce overhead costs and optimize workflow wherever possible.
Reddit’s Management
When considering Reddit’s prospects as a public company, its important to consider who will be at the helm. The current CEO and co-founder, Huffman, has been held responsible by users following the API incident. The huge loss in popularity for Huffman, could pose problems for Reddit as a public company since unpopular CEOs might be considered a liability. A positive corporate image is essential for retaining users, particularly on such a user-driven platform. X is a perfect example of this, as users who took issue with Elon Musk and his plans for Twitter post-acquisition, have mostly fled.
But as a co-founder, Huffman could be too integral to replace. Other members of management include Jen Wong, who currently serves as the COO. Wong was previously COO at Time Inc. and worked at McKinsey. As for Reddit’s CTO, Chris Slowe, he is one of the company’s very first employees. Both Slowe and Huffman are important to ensuring the continuity and preservation of Reddit.
However, the most important member of management when it comes to Reddit’s IPO ambitions could be its CFO, Drew Vollero. Vollero was CFO at Snap when that company IPO’ed so he brings invaluable experience to a social media company preparing to go public. As CFO and CEO, Vollero and Huffman will be the face of the company leading earnings calls and investor relations. Their roles in the IPO process cannot be understated, which is why Huffman’s recent unpopularity is concerning.
The protests were widely expected to force CEO Steve Huffman to step down, but Huffman has prevailed. As ad money flows away from X due to controversies, Reddit has had a unique opportunity to claim more market share and Huffmann has been able to capitalize on this growth.
Current estimates for for full year 2023 revenue are over $800 million in ad revenue. While this represents a 20% YoY increase, it falls short of management’s goal of achieving $1 billion in 2023 ad revenue. As much as users disliked Huffman’s decision to add data rate limits on the free access tier of its API, it was necessary to resolve a major flaw in Reddit’s business model. As long as users are viewing Reddit from other apps, the company will lose the views and clicks it needs for ad revenue.
With the API fight behind him, Huffman may be moving on to a new battle. Google and Bing have bickered with Reddit over using Reddit’s data and the compensation Reddit is owed for it. But now, Reddit may be considering blocking their crawlers in another attempt to crack down on AI companies training their models using its data.
While this could hurt the number of visitors to Reddit since its posts would no longer appear when using a search engine, the sentiment within the company appears to be that Reddit can survive without these additional eyeballs.
Reddit’s Business Model
Before deciding whether to invest in shares of Reddit once it goes public, its important to analyze its business model which is at the crux of both the Reddit IPO and its future as a social media company.
Even without any improvements on its existing model, Reddit is one of the most successful social media platforms, with around 55.79 million daily active users and over 1.6 billion monthly active users in 2023. Both these metrics are expected to grow significantly by 2025 with daily active users increasing 24.4% and monthly active users increasing 92.9% by 2025.
As its userbase grows, Reddit’s advertising revenue will increase as well. Estimates for 2023 put Reddit’s average revenue per user at $1.02, but it is projected to increase reaching $1.44 in 2024 and $2.04 in 2025. This provides a bullish outlook for Reddit’s growth as a social media company, particularly if they are able to cut costs and optimize the site for user experience.
When it comes to user experience, Reddit is at a bit of a crossroads. As a forum for open discussion on diverse topics, it has the ability to attract a variety of users. For the most part, its existing users have been resistant to changes in the platform’s brand identity which is not unusual, but it poses a long-term problem for the platform.
Reddit has what may be considered an outdated and poorly organized layout, in addition to poorly monitored forums that lead to rule-breaking and misinformation. This could deter new users from the platform, and may give its competitors an edge unless these issues with user experience are addressed.
In 2023, Reddit reached 1.6 billion monthly active users, while Facebook reached 3 billion, Instagram 2 billion, and X had 666 million as of October 2023. Discord and Quora have fewer monthly users than Reddit but offers a similar forum. As the API incident has already highlighted, Discord has the potential to attract users who’ve grown unhappy with Reddit. Whether competition from Discord poses a long-term issue for Reddit has yet to be seen, but is definitely something investors should keep in mind.
Reddit IPO Forecast
Overall, whether the Reddit IPO occurs ultimately depends on how the company’s management views the IPO market.
SheIn’s much anticipated IPO is currently in limbo, which means they will not have the benefit of another company testing the waters. However the macroeconomic outlook is improving as the Fed is widely expected to cut interest rates in 2024.
Even if now is not the best time for a Reddit IPO, it appears that the company’s management is very interested in taking the company public given that this is their second attempt. Besides rumors that the company will IPO in March, the company has already started taking the necessary steps to increase ad revenue.
While these actions were controversial and alienated some users, they did increase ad revenue. On one hand, investors could take this as a sign that Reddit’s managemnt is ready to make the necessary decisions to grow the company. But on the other hand, some might consider it a sign that its management has lost touch with its userbase.
Given Reddit’s huge appeal to retail investors, its difficult to imagine that Reddit’s IPO will not be met with significant fanfare. Now that Reddit is potentially considering a revised valuation of closer to $5 billion, it positions the company to exceed expectations rather than dissapoint. Overall, the outlook for Reddit’s IPO in 2024 is much stronger than it was in 2021 thanks to its user growth and the better macroeconomic environment.
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