It’s popularly known as a forum-based social media platform that hit the headlines in January 2021 for being the place where r/WallStreetBets plotted the seismic short squeezes of GameStop and AMC stocks alike. Now, Reddit plans to launch its own IPO in the coming weeks – how will retail investors react?
The San Francisco-based company confirmed in mid-December that the listing is set to take place after the US Securities and Exchange Commission completes its review process – depending on market conditions and other factors. Reddit also claimed that no decisions have yet been taken regarding the number of shares or pricing range for its initial public offering.
Reddit, which was valued at $10 billion by investors in a funding round in the summer of 2021, is yet to confirm its target valuation for the listing.
Although it’s not a public company yet, Reddit inadvertently played a key role in some of the biggest stock market movements across the past year.
(Image: Ally)
As we can see from the performance of both GameStop and AMC over the course of 2021, we can see that the two stocks – both favorites of the Reddit group r/WallStreetBets – have rallied significantly over the past 12 months.
Both GameStop and AMC stocks are regarded as meme stocks because they operate purely on investor sentiment, as opposed to their respective fundamentals.
Whilst Reddit, a social network that’s accumulated around 430 million active monthly users, offers plenty in the way of fundamentals, the company’s role in the popular world of meme investing may generate higher volumes of interest and purchase intent among retail investors.
Based on fundamentals, Maxim Manturov, head of investment advice at Freedom Finance Europe, highlighted Reddit as one of his picks for the biggest listings of 2022.
“In 2022, companies such as Stripe, Instacart, Databrics, Discord are all likely to float, and Reddit is also expected to float in March 2022. Of the current bids in the pipeline, the ones that could float in the US market soon are Turo, Thomas James Homes and HomeSmart Holdings,” Manturov stated when weighing up the year ahead for big-name market debutants.
So, could Reddit become the latest popular meme stock for investors to buy into? Let’s take a deeper look into what the social platform’s IPO may look like:
Instant Meme stock
Members of r/WallStreetBets – now extending to 11 million – have been discussing the prospect of buying Reddit’s stock since the platform confidentially filed its paperwork with the SEC in December.
Some sections of the group were enthusiastic about buying into the stock. "If Reddit doesn't become the biggest meme stock ever I'm going to be severally disappointed with all of us," remarked one user, while another predicted that Reddit would become an "instant meme stock," reported Markets Insider.
So what of Reddit’s financial health today? The company has raised a total of $1.3 billion since its founding in 2005, with over 70% of its funding coming from the past two-and-a-half years. Reddit earned a $9.6 billion valuation in August 2021 – a figure that’s more than triple its 2019 valuation of $2.7 billion.
Based on an anticipated target initial public offering valuation of $15 billion, and taking into account the company’s most recent advertising revenue of $100 million in Q2 2021 along with its current annual run rate of $400 million, Reddit’s price-to-sales ratio would be 37.5. This is higher than the company’s key competitors like Snap, Meta, and Twitter.
These figures suggest that Reddit may not need the help of meme-oriented retail investors to become a successful listing. However, Reddit’s position as a stock that’s loved by the prolific r/WallStreetBetsGroup as well as a high-performing tech platform could see the stock rally comfortably in the wake of its listing.
Doubts over Reddit’s Meme credentials
Not all r/WallStreetBets users were excited at the prospect of Reddit going public. Some users have already become frustrated at the company’s subtle transitions towards a more traditional tech firm with advertisers to prioritize.
Jaime Rogozinski, the founder of WallStreetBets, has bemoaned the company that Reddit has become, having recognized the company as a safe space that’s free of the Wall Street establishment. “In that sense, it feels like their home is being corporatized and becoming part of the establishment,” Rogozinski said.
Rogozinski is no longer part of the group, but his sentiment is shared across many of its members. With this in mind, it shouldn’t come as a surprise to investors if Reddit’s stock gets snubbed by the majority of r/WallStreetBets investors.
However, as a company that’s set to launch one of 2022’s most hotly anticipated IPOs, Reddit may not need the help of meme investors to enjoy a good start to public life.