Investors know Reddit well. The freewheeling message center gained global fame after Reddit-based stock discussion groups drove coordinated short squeezes aimed at hedge funds that were shorting popular companies like GameStop and AMC. “Meme stocks” were effectively invented on Reddit.
Reddit itself is now planning an IPO. The company filed a confidential draft registration statement with the SEC in December 2021 and may go public as early as March 2022 if market conditions seem receptive.
Will Reddit’s high level of recognition in the investment community translate into a positive reception for the company’s shares? Will the home of meme stocks become a meme stock? Is it possible to acquire shares before the IPO?
Let’s take a closer look.
What is Reddit?
Reddit styles itself as “the front page of the internet”. Their “about” page describes the company in these terms:
Reddit is home to thousands of communities, endless conversation, and authentic human connection. Whether you’re into breaking news, sports, TV fan theories, or a never-ending stream of the internet’s cutest animals, there’s a community on Reddit for you.Reddit
Reddit is a network of communities organized around interests. The site hosts over 100,000 active communities, some of them famous (think Wall Street Bets) and some obscure. There are over 13 billion posts and comments, and the site attracts over 50 million users daily.
Reddit is a social media site. It’s analogous to Facebook or Twitter, except that the site is organized by interest-focused groups, rather than by individual or business pages. It ranks 19th among the world’s most-visited websites.
Reddit was founded in 2005 by a pair of former college roommates, Steve Huffman and Alexis Ohanian. It was sold to Condé Nast publications in 2006 and became an independent subsidiary of Condé Nast parent company Advance Media in 2011.
Reddit is composed entirely of user-generated content. It’s a bulletin board system allowing users to post, comment, and upvote or downvote other posts or comments. The content is organized into subreddits, discussion rooms with their own subscribers, moderators, and pages.
Reddit generates revenue from advertising and from an ad-free premium membership tier. Advertisers can target specific audiences by selecting the subreddits where their ads will appear. Users can also purchase “coins”, which allow them to place awards on valued posts or comments.
When Will Reddit Hold Its IPO?
Reddit announced in December 2021 that it had filed a confidential draft S-1 statement with the SEC. In early January 2022, the news broke that the Company has selected Goldman Sachs and Morgan Stanley as lead underwriters for the IPO, with JP Morgan Chase also said to be involved.
The number of shares, price range, and projected date of the IPO have yet to be announced, but some observers suggest that it could be as early as March 2022, and could seek a valuation up to $15 billion.
Any IPO schedule is likely to depend at least partially on market conditions. Tech stocks are seeing a dramatic selloff in mid-January, which could potentially lead to a delay if market conditions don’t change.
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What Do We Know About Reddit’s Fundamentals?
Until a formal S-1 is filed and publicly available we will have no authoritative, up-to-date knowledge of the Company’s fundamentals. Revenue figures are available through 2020.
Reddit revenue (2014 – 2020)
Some reports indicate that Reddit achieved $100 million in ad revenue in Q2 2021. Data are also available for monthly active users through 2019.
Reddit monthly active users
Reddit changed from disclosing monthly active users to disclosing daily active users (DAUs) in 2019. They reported 36 million DAUs in 2019 and 52 million in 2020.
If Reddit achieves a $15 billion valuation in its IPO and the $100 billion quarter revenue figure is accurate, the Company’s price/sales ratio would be 37.5, well above Meta (Facebook) at 7.8 and Twitter at 6.2. Reddit would be showing a much higher year-over-year revenue growth rate, at 192%.
Reddit has never reported earning a profit.
Reddit has held eight financing rounds, raising a total of $1.3 billion. The most recent round concluded in August 2021, raising $410 million and leaving the Company valued at $9.6 billion.
Reddit funding (total)
Reddit has attracted 28 venture capital investors, including Fidelity, Sequoia Capital, Tencent, and Andreessen Horowitz.
How Can I Buy Reddit Stock
Reddit is a privately held company. Until its IPO its stock will not trade on any public exchange.
It may still be possible to buy shares through pre-IPO marketplaces that acquire shares from early investors or from employees who have received stock options as part of their compensation.
Pre-IPO Secondary Markets
There is no assurance that pre-IPO shares will be available through these marketplaces. The sellers may impose investor qualifications and other requirements.
- Forge Global merged with Sharespost in 2020 to form what is now the world’s largest private share marketplace. The platform has a minimum investment of $100,000, and some shares may require more. You may need to pass a qualification process.
- EquityZen sells private company shares that it has acquired from employees or early investors. EquityZen works with issuing companies to assure that transactions are recognized. The minimum investment is $10,000 and may be higher for some companies. You will need to meet the revised SEC “accredited investor” criteria. Forge Global merged with Sharespost in 2020. The combined company is now the world’s largest marketplace for private company shares. Investors must make a minimum purchase of $100,000 worth of shares. The minumum may be higher for some companies. Investors may need to meet qualification requirements.
- EquityZen acquires shares from early investors or from employees who have received stock as part of their compensation. They work with companies to assure that transations will be recognized, and sell the shares to investors who meet the revised SEC “accredited investor” criteria. There’s a minimum investment of $10,000, which may be higher for some companies.
- Nasdaq Private Market provides access to private-company shares for investors who meet the SEC’s accredited investor criteria.
⚠️ Investing in pre-IPO shares is risky, and there’s no assurance that an IPO will take place or that you will be able to sell your shares. If you’re considering it, learn more about pre-IPO investing first.
📚 Review this guide to how to buy pre-IPO stock before you start!
Invest in the IPO
Investing in the IPO itself is a more accessible option, though there may still be requirements. Limited numbers of shares are allocated to brokers, and there’s no assurance that you’ll be allocated the number of shares you want or any shares at all.
A number of prominent brokers allow IPO investing for clients. There will be qualifying requirements, which vary from broker to broker.
- Charles Schwab allows IPO participation for clients with an account balance of $100,000 or above and at least 36 trades in their history.
- E*Trade does not have trading history or account balance requirements for IPO participation. The underwriters of the IPO will provide an eligibility questionnaire.
- Fidelity allows IPO participation for clients in their Private and Premium client groups, or those who meet a minimum household asset requirement.
- TD Ameritrade only allows IPO participation when they are part of the selling group. Participants must have made 30 trades in the last calendar year or have a minimum account balance of $250,000.
If you are buying in an IPO there will be a market for the shares you hold, though you can’t be sure of a profit. Many IPO shares come with a lockup period, often 60 or 90 days. You will not be able to sell your shares until the lockup period expires.
Invest After the IPO
The safest and most accessible way to invest in Reddit is simply to wait until after the IPO. You’ll be able to buy shares through your usual broker and you will be able to sell at any time.
If you buy after the IPO you won’t get the rock-bottom prices that you would get from a pre-IPO purchase or the somewhat higher price you’d pay for participating in the IPO. On the other hand, you will be able to gauge the market’s reception to the IPO before you buy. Not all IPOs soar out of the blocks. Some of them crash.
Getting in before or at the IPO can yield huge gains if the stock does well immediately after the IPO. That doesn’t always happen.
If you’re buying with a long-term horizon, buying after the IPO is often the safest strategy. You’ll have exit flexibility and if the company succeeds you still have excellent profit potential. The key is choosing the companies that are set for long-term success, not necessarily in getting in as early as possible.
Are There Any Concerns About Reddit?
Every investment has risks, and early-stage companies often have substantial risks. Here are some things to consider before investing in Reddit stock.
- Reddit is not profitable. The Company was relatively late to pursue advertising on a large scale, apparently because they were concerned with user reaction to ads. It is still possible that the pursuit of profitability could antagonize a user base that was attracted to Reddit’s independent image.
- There may be regulatory or liability issues. Reddit has the reputation for being loosely moderated and more open to controversial content than some better-established social media platforms. That’s attractive to many users, but it could attract lawsuits or attention from regulators.
- Stretched valuation. Reddit is reportedly pursuing a valuation that would be quite high relative to similar companies. If they fail to continue their growth rate – and even if they do continue their growth rate – that valuation may not be achievable or sustainable.
- Market conditions may not be positive. Current market conditions are shaky, to put it mildly. If Reddit pushes ahead with an IPO despite a weak market they may not achieve the desired market reception. If they postpone the IPO investors may be stuck with shares they can’t move.
- Limitations on foreign growth. Reddit is currently banned in several countries, including China, India, and Indonesia. These three countries account for almost 40% of the world’s population..
These are speculative risks: they may or may not emerge and they may or may not affect the company. There may also be other risks that are not currently anticipated.
Reddit is not one of the largest IPOs expected in the first half of 2022, but the Company’s high profile in the investment community assures that it will draw outsized levels of attention. That does not, of course, guarantee any particular outcome.
The schedule of the IPO will probably be flexible. If markets continue their current slide the IPO could be delayed.
It may be possible to purchase pre-IPO shares through private equity marketplaces or to participate in the IPO through selected brokers. Either way you will need to qualify. If you don’t, you can buy shares after the IPO.
As with any investment, you’ll need careful research to determine whether Reddit shares are the best use of your money. It’s always worth discussing your plans with a qualified investment advisor!
Reddit is a social media platform focused on interest-centered groups rather than personal or company pages. It contains user-generated content divided into independently moderated subreddits. Revenue comes from advertising and from an ad-free premium tier.
Reddit had 52 million daily unique users in 2020, up from 36 million in 2019. 25% of US adults use Reddit. Revenue, primarily from ads, was reportedly $100 million in Q2 2021, up 192% from the same period in the previous year.
Reddit is currently a privately held company, so its stock does not trade on any public exchange. You may be able to buy pre-IPO shares on private share marketplaces, but availability is uncertain and there may be qualifications. You may also be able to buy IPO shares through selected brokers, who may also have requirements for participation.
All investments involve risk. Reddit’s freewheeling style could attract regulatory problems and lawsuits, but trying to rein in that style could antagonize users. The Company may have to boost ad presence to generate revenues as a public company, which could also offend its user base. The Company is not profitable and is reportedly seeking a higher valuation than many similar and better-established companies.