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Will WallStreetBets spoil Reddit’s plans?

INVESTINGWill WallStreetBets spoil Reddit’s plans?

Reddit has big plans, but users want to sabotage it. Will WallStreetBets show its strength again?

After almost two years of stagnation in the American stock market, we have finally seen the IPO that everyone is talking about, not just those in the world of finance. This is the debut of the world’s largest independent internet forum, Reddit. The listings on the New York NYSE are set to launch on March 21. The medium gained popularity among stock market investors in the years 2020-2021, when retail traders registered in the WallStreetBets group shook the market and Gamestop shares. Will Reddit now suffer as a result of stock market ambitions?

Speculation about Reddit’s possible IPO has been ongoing for a long time, but the company had been waiting for the right moment to debut. It seems this moment has arrived, as there has been a regular bull market on Wall Street for months and the attitude towards risk has significantly improved. Secondly, the US economy, where Reddit generates almost 50% of its traffic, remains strong. Thirdly, the nearly 2-year streak of losses has finally been broken, and the last quarter of 2023 brought the company a profit. Reddit intends to maintain this trend in the coming quarters, and Wall Street will indeed be watching this. According to anonymous sources from Bloomberg who are familiar with the IPO, Reddit is aiming for a valuation between $6 and $6.5 billion. The price per share is expected to be between $31 and $34. Investors ask: is it worth it?

WallStreetBets versus Reddit?

In the IPO, over 15 million shares will be sold by Reddit, and another 7 million by investors who are de facto its employees. So it is not surprising that the highest possible valuation is in the interests of shareholders, as well as the company itself, which may see it as the only opportunity to raise capital from the stock market. Existing shareholders and their family members, for whom shares will be issued, want to raise up to $748 million from the public offering. Approximately 8% of securities will be reserved for the management, employees, and forum moderators, allowing them to share the risk as well as potential profits with new investors.

Despite the market’s optimism, Reddit’s stock market debut has underlined a number of controversies. Individual investors are unhappy with the valuation ranges which have changed several times over the past few months and there are still many conflicting opinions about the company’s value even just before the debut. The lack of regular profitability and strong competition in the social media field should also be noted. All of this means that the WallStreetBets group originating from this forum, intends to short Reddit shares as soon as listings start. Will community investors sink the company, spoiling the sentiment? Or will we see some sort of revenge from the major institutions, who after the last “meme stocks” want to get their own back on WallStreetBets members? It will certainly be worth following this market showdown, as it could be another financial event that is discussed worldwide, not just in industry media.

5 … 10 … 15?

The social media industry is currently doing better than at the beginning of 2023. The biggest players are grabbing their lion’s share of the market, benefiting from the support of AI technology and an increased optimism from advertisers. Reddit maintained its position in the market for many years, creating a unique niche that was independent of giants like Meta or ByteDance. In 2023, Reddit recorded almost 850 million active users per month. The average number of daily active users this year is estimated to reach about 63 million, and by 2025 this is expected to increase by 12%, reaching about 70 million daily active users by October 2023 already.

The company sees its chance in the advertising sector, where it is still in an early stage of development. In the management’s opinion, advertisers have recognized the unique opportunities to reach a specific group of users, who cannot be found anywhere else. This could be a particularly important area given the better macroeconomic situation in the world, naturally leading to bigger advertising budgets from large corporations. But that’s not all, Reddit also wants to benefit from the trend related to artificial intelligence.

However, it doesn’t seem that they could get very far on the ‘AI’ wagon. As for an AI-driven bull market IPO, the AI thread had to appear. The company is at the stage of selling permits to access data on the platform. These are to be used for training subsequent language models. Their estimated value is about USD 203 million, on a two or three-year license. Reddit is counting on an additional USD 66.4 million from this and has already signed its first agreement with Google.

In January of this year, the company was considering a valuation of 5 billion dollars, which it will ultimately probably raise to over 6 billion USD. This is still far below the near 15 billion dollar valuation from the time of the pandemic. Currently, investors are more cautious, interest rates have increased significantly, and markets no longer reach astronomical valuations like those seen around the turn of 2020 and 2021. Despite a lower expected Reddit valuation, it is far from being considered a bargain.

Valuation far from a bargain

The ratio of Reddit’s valuation compared to other listed companies in the social media and advertising industry does not seem particularly attractive. If the average daily number of users (the revenue base) were similar to the apps in the Meta Platforms family (about 3.2 billion active users across Facebook, Instagram, WhatsApp), the valuation of Reddit could be around 2.7 billion USD compared to the 1.2 billion USD valuation of Meta alone. But even such a comparison does not seem to bring this scale closer because in 2023, Reddit’s revenue per user (ARPU) was about 0.78 USD compared to the 44.6 USD generated by Meta.

Also, if we compare the valuation with other companies operating in the advertising and internet sector, such as Opera shares, we see that the valuation is high. Opera has about 350 million users and with over 1.4 USD ARPU, a rapidly growing net profit, and almost zero debt, it is valued at 1.4 billion USD. However, it is a fact that Reddit’s profitability is gradually improving. In 2023, Reddit showed a net loss of 90.8 million USD, at record revenues of 804 million USD. In 2022, it was a loss of 158.6 million USD, with revenues of 666.6 million USD. The rhetorical question can be asked: will investors not value the company too highly in advance?

More than two years after the first confidential application to the SEC, investors have another chance to buy shares of their “favorite forum”. It seems that investors willing to take a risk may drive the price of RDDT shares, counting on above-average volatility. Wall Street’s attention is now concentrated on Reddit, but it looks like over the next few months we will witness several interesting IPOs. On the US market, these include Microsoft-backed Rubrik – specializing in data security, and Waystar Technologies – operating in the health care sector. In Europe, upcoming stock market debuts of brands like Douglas and Golden Goose are worth paying attention to.

Author: Eryk Szmyd, XTB analyst

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