Market story: ⚡Reddit will debut on NYSE. Will WallStreetBets shortselling destroy it?

After almost two years of languishing on the US stock market, we lived to see an IPO that the whole world, not just the financial world, is talking about. We're talking about the stock market debut of the world's largest independent Internet forum, Reddit. The listing on New York's NYSE is expected to go live as early as March 21. Reddit gained popularity among stock investors in 2020-2021, when retail traders affiliated with the WallStreetBets group shook up the stock market, cornering institutional short-sellers on GameStop shares. Will Reddit now suffer from stock market ambitions?

There has been speculation about a potential Reddit IPO for a long time, however, the company was still waiting for the right time to debut. It has been known for a long time that many times the 'timing' determines the achievable valuation. It seems that this moment has just arrived, as Wall Street has been in a regular bull market for months, and risk attitudes have improved significantly. Second, the US economy, from where Reddit generates almost 50% of its traffic, remains strong. Third, the nearly 2-year series of losses has finally been broken, and the last quarter of 2023 saw the company turn a profit. Reddit intends to continue this trend in future quarters, and Wall Street will certainly be watching. According to anonymous Bloomberg sources familiar with the IPO offering, Reddit is aiming for a valuation between $6 billion and $6.5 billion. The price per share is expected to be between $31 and $34. Investors are asking: is it worth it?

WallStreetBets vs. Reddit?

In the IPO, more than 15 million shares will be sold by Reddit, and another 7 million by investors who are its de facto employees. Not surprisingly, the highest possible valuation is in the interest of shareholders, as well as the company itself, for which it may be the only opportunity to raise capital from the stock market. Existing shareholders and their family members, for whom the shares will be issued, are looking to raise up to $748 million from the IPO.

About 8% of the shares will be reserved for the forum's executives, employees and moderators, allowing them to share the risks as well as possible profits with new investors. While there is optimism in the markets, Reddit's IPO is highlighted by a number of controversies. Individual investors don't like the valuation spread, which has changed several times over the past few months, and even just before the debut there are many conflicting opinions about the company's value. Added to this is the lack of regular profitability and high competition in the social media field.

This makes the WallStreetBets group, which originated from this forum, intend to short Reddit's shares when the listing moves. In this way, will the affiliated retail investors plunge the company, spoiling sentiment? Or will we see retaliation from large institutions, who will want to retaliate, as it were, against WallStreetBets members after the recent "meme stocks"? This market clash will certainly be worth following, as it could be the next financial event commented on around the world, not just in the trade media.

5 ... 10 ... 15 ?

The social media industry is doing better now than it did in early 2023. Major players are grabbing the lion's share of the market, benefiting from the support of AI technology and increased optimism from advertisers. Reddit has maintained its position in the market for many years, creating a unique niche independent of giants like Meta and ByteDance. As of 2023, Reddit recorded nearly 850 million monthly active users. It is estimated that the average number of daily active users this year will be around 63 million, and will increase by 12% by 2025, reaching around 70 million daily active users as early as October 2023. 

The company sees an opportunity in the advertising sector, where it is still in the early stages of development. According to management, advertisers were to see unique opportunities to reach a specific group of users, absent anywhere else. This could be a particularly important area, given the improved global macroeconomic situation, which will naturally bring larger advertising budgets for large corporations. That's not all, however, as Reddit is also looking to catch on to the trend related to artificial intelligence. 

However, it doesn't seem to be able to go very far on the 'AI' wagon. But for an IPO in a bull market driven by artificial intelligence, the AI thread had to come up after all. The company is in the process of selling permits to access data on the platform. These are to be used to train more language models. Their estimated value is about $203 million, on a two- or three-year license. From this, Reddit is hoping for an additional $66.4 million, and already has its first agreement with Google. 

As recently as January of this year, the company was considering a valuation of $5 billion, which it will eventually raise probably to more than $6 billion. That's still well below the near $15 billion valuation of the pandemic era. Today, investors are more cautious, interest rates have risen significantly, and markets are no longer reaching the astronomical valuations of late 2020 and early 2021. Despite Reddit's lower expected valuation, it is far from being considered a bargain.

Valuation far from an opportunity?

Reddit's valuation ratio relative to other listed social media and advertising companies does not seem particularly attractive. If the average daily number of users (revenue base) were similar to the Meta Platforms family of apps (about 3.2 trillion active users across Facebook, Instagram, WhatsApp), Reddit's valuation could be about $2.7 trillion versus the current $1.27 trillion valuation of Meta. But even such a comparison doesn't seem to approximate that scale, since in 2023, Reddit's revenue per user (ARPU) was about $0.78 against the $44.6 generated by Meta. 

Also, if we juxtapose the valuation with other companies operating in the advertising and Internet sector, for example, and Opera shares, we see that the valuation is high. Opera has about 350 million users and with more than $1.4 ARPU, booming net profit and almost zero debt, it is valued at $1.4 billion. The fact is, however, that Reddit's profitability is gradually improving. In 2023, Reddit had a net loss of $90.8 million, on record revenues of $804 million. In 2022, it was a $158.6 million loss, with revenues of $666.6 million. A rhetorical question can be asked: so will investors prematurely price the company too high?

More than two years after the first confidential filing with the U.S. Securities and Exchange Commission (SEC), investors have another chance to buy shares of their "favorite forum." It appears that risk-prone investors may be driving RDDT stock, hoping for above-average volatility. Wall Street's attention is now focused on Reddit, but it looks like we will see some interesting IPOs in the coming months. In the US market, these include Microsoft-backed Rubrik, which specializes in data security, and Waystar Technologies, which operates in the healthcare sector. In Europe, look out for upcoming IPOs from companies such as Douglas and Golden Goose.

Eryk Szmyd Financial Markets Analyst at XTB