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Reddit, the popular online community of tens of thousands of subgroups devoted to interests as diverse as cryptocurrency to a childless existence, has announced that it has submitted a confidential report to the Securities and Exchange Commission (SEC). This represents the company’s first step towards an initial public offering (IPO).
The announcement will undoubtedly be exciting (or disappointing) for millions of dedicated Redditors, but by no means will this be the biggest IPO of 2022. Reddit’s latest funding round yielded $700 million, valuing the company at $10 billion — or about one-seventh the size of Snap (SNAP), Snapchat’s parent company.
The question for potential investors is whether raising billions through an IPO will allow Reddit to invest in future growth so it can rival the reach of its competitors, or whether the company will enjoy anything beyond a niche in the social media ecosystem.
Reddit’s best feature is pretty straightforward: it’s very popular! Over 50 million people counted as daily active users of Reddit as of January 2021 – the latest numbers available – contributing to more than 50 billion page views per month.
Perhaps most importantly, Reddit’s user metrics are experiencing solid growth. As a private company, data can be hard to come by, but Reddit revealed that the number of daily active users reached 52 million in October 2020, up 44% from the same month the previous year.
A recent Pew Research Center survey found that 18% of Americans say they use Reddit, up from 11% in 2019. Here’s a number that should be especially tempting for businesses looking to connect with potential consumers: More than a quarter of Americans who earn more than 75,000 Dollars say they use Reddit, per Pew.
The increased engagement has led to significant gains in advertising revenue, according to the company. In the second quarter of 2021, Reddit raked in over $100 million in revenue, which is a nearly 200% increase over the previous year.
The growing real-time Reddit profile came to light in January 2021 during the meme stock boom, which saw companies like GameStop (GME) and AMC Entertainment (AMC) soar in value after amateur day traders decided to pressure short sellers and invest collectively. A swarm of investors got their start on the r/WallStreetBets subreddit, and by the time the frenzy peaked, even Congress got into the act.
The case against Reddit
If only crafting a great social media platform was enough to become a profitable business, let alone a good investment. To get really big money, you have to have a dominant position, and it’s one that is far from Reddit.
For example, 81% of Americans say they watch videos on Youtube, according to the Pew Center, and about 7 in 10 Facebook users claim. Nearly 40% of photo scrolling is on Instagram, 28% on network on LinkedIn and a quarter of message exchanges evaporate on Snapchat.
According to daily active users, Reddit stays in the minor leagues. Over 50 million daily active users as of January 2021 compares to nearly 200 million daily active users on Twitter in a similar period, while Facebook counts daily active users in the billions.
The text-based site Reddit, much like the comment boards of an old internet, lags far behind its competitors. Not to mention the dollars devoured by the Google search engine or the Amazon marketplace.
In fact, Amazon, Google and Facebook consume roughly two-thirds of digital advertising, according to eMarketer. This domination is causing the most popular platforms from Reddit to suffer.
Take Snap, which generated more than $1 billion in revenue in the third quarter of 2021, nearly 10 times Reddit’s earnings in the second quarter. The company reported $3.7 billion in revenue over the past 12 months. However, its stock is down 7.3% for the year, compared to a gain of nearly 25% for the S&P 500.
This doesn’t mean that Reddit can’t be competitive, it just indicates how difficult the road ahead is for the company.
what should you do
Now, potential investors are in a wait-and-see mode. Over the following months, Reddit will release more recent financial statements, outlining the opportunities and pitfalls it sees ahead. Reasonable people will come to their own conclusions about its ability to provide future cash flows.
It is important, however, to be open-minded, even if you are a fan of the platform. Social media platforms and digital advertising are tough businesses in their own right, but they face the potential for more government regulation in the coming years, especially after the recent Facebook scandal.
Gone are the days of blind faith in the rosy world that tech giants promised.