Here comes Reddit, the most anticipated IPO of the year! As soon as tomorrow, the social media company plans to go public at $31 to $34 per share. That would give it a valuation of about $6.5 billion. One expert believes it could deliver a hundred-bagger â in other words, 100x your money. Should you invest? [â¦] You're receiving this email as part of your subscription to Crowdability. [Unsubscribe here](. [Crowdability Editorial]( [feature] Should You Invest in Redditâs IPO This Week? Hereâs the Answer Matthew Milner Here comes Reddit, the most anticipated IPO of the year! As soon as tomorrow, the social media company plans to go public at $31 to $34 per share. That would give it a valuation of about $6.5 billion. One expert believes it could deliver a hundred-bagger â in other words, 100x your money. Should you invest? Letâs take a look. The Reddit Story Reddit is a social-media platform and online community where users engage in discussions, share content, and vote on posts and comments. Users join specific Reddit communities that focus on their interests. These communities are called subreddits. The most popular ones include âfunny,â with more than fifty-seven million members; âmemes,â with about thirty million members; and âWallStreetBetsâ (which famously rallied around GameStop stock in 2021), with about fifteen million members. The company was founded in 2005 by two former roommates from the University of Virginia â Steve Huffman and Alexis Ohanian â and their friend Aaron Swartz. Just one year later, it was acquired by magazine publisher Condé Nast for $10 million. Reddit has grown by leaps and bounds since then. Itâs currently the 16th-most-visited website on the internet, and the seventh-most-popular social networking site. Furthermore, its investors now include OpenAI CEO Sam Altman, whoâs invested at least $60 million into the company; Peter Thiel, the co-founder of PayPal (PYPL) and Palantir (PLTR); and Fidelity Investments. The Business But Reddit isnât just a community. Itâs also a business. Hereâs what its business looks like. - 100,000 active communities (subreddits), 73 million daily active users, and one billion cumulative posts. - Reddit makes money through advertising. Reddit also offers a premium membership for users who donât want to see ads. The cost is $5.99 per month or $49.99 per year. - A recent deal gives Google access to Redditâs user-generated content. Google will use this content to help train its AI systems. The deal is worth ~$60 million per year. - Reddit isnât profitable, but the companyâs revenues are growing. Its revenue in 2023 was $804 million, up from $666 million in 2022. Its net loss for 2023 was $90.8 million. The IPO Redditâs $6.5 billion IPO is expected to happen tomorrow. Morgan Stanley and Goldman Sachs are the lead underwriters, and the company will trade on the New York Stock Exchange (NYSE) with the ticker symbol RDDT. This will be one of the most closely watched IPOs of 2024. Itâs the first major tech company this year to have an initial public offering, and the first IPO of a social media company since Pinterest went public in 2019. So, what do you think â should you invest? 100X Potential By many industry metrics, Redditâs $6.5 billion IPO valuation looks about right. For example, at that valuation, Reddit will have a âmarket valuation per daily active userâ thatâs lower than Metaâs, but higher than Snapâs: - Meta, the parent of Facebook, has a market value per daily active user of about $387. Thatâs a $1.1 trillion market cap divided by 3 billion Daily Active Users (DAUs). - Snapâs market value per daily active user is about $71 ($28.7 billion / 406 million DAUs). - Reddit, meanwhile, will have a market value per daily active user of about $89 ($6.5 billion / 73 million DAUs). But some experts believe Reddit is vastly undervalued at this level. Scott Galloway, for example, believes the companyâs market cap could grow 100x from here. Galloway is an NYU professor, serial entrepreneur, podcast host, and prominent board director and advisor. His core argument is that, in todayâs world, the most valuable consumer companies have figured out how to monetize attention. In fact, he calls attention the ânew oil.â On this measure, Reddit is a beast. The company attracts more monthly users than Pinterest or LinkedIn â but its valuation is tiny as compared to these giants. He believes Redditâs low valuation is due to widely-known challenges in its ad tech and business model. But he notes the company is already making rapid progress on these fronts â for example, itâs restricted API access (âakin to plugging leaks in its pipelineâ), and rolled out new advertiser tools. As he wrote about Reddit: âHistory â along with any recognition of just how difficult it is to build a global platform like Alphabet or Google â suggests the upside potential is asymmetric.â How much upside does he think there is? Hereâs Galloway: At an anticipated pricing that puts the valuation at $6.5 billion, Reddit is the only firm I can think of that has an opaque, but visible, path to a 100x return. Figuring out the monetization is hard. Developing a product that commands this level of attention is harder, and Reddit has done it. It Pays To Get in Early Despite Redditâs upside potential, we believe you shouldnât rush out to invest in its IPO. Here are three reasons you should hold your horses: - There are plenty of dissenting opinions about Redditâs potential. For example, David Trainer, CEO of New Constructs, a research firm thatâs powered by artificial intelligence, says: âReddit looks overvalued, and we think investors should pass on this IPO." - The investment banks that underwrite initial public offerings typically âengineerâ the IPO price so it pops significantly before investors like you have a chance to buy-in. In other words, itâs not unlikely youâd be buying at an artificially âhighâ price. - About 1.76 million shares of Reddit stock have been allocated to Redditâs top contributors. Theyâll be able to sell their shares right at the IPO, without waiting for the typical six-month holding period. This could put enormous selling pressure on the stock. So, whatâs a better strategy than buying at the IPO? Well, in general, the better strategy is getting in even earlier. In other words, buying before the IPO. As long-time Crowdability readers know, it can pay to get in early, when companies are young and privately-held. For example, Peter Thiel invested $500,000 into Facebook when it was still private. By the time the company IPOâd, those shares had rocketed to a value of $1 billion. But given the upside potential with Reddit, we believe you should still consider an investment in its public stock â just not quite yet. Instead, wait until the company reports its first quarterly earnings as a public company. At that point, weâll have a clearer signal about its path to revenue growth and profitability. Thatâs what weâll be doing. Happy Investing! Best Regards,
[Matthew Milner]
Matthew Milner
Founder
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