After decades in business, Reddit (Nyse: RDDT) has finally decided to go public making it the first social media to do so since Snap (Nasdaq: SNAP) in 2017. This 20-year-old social media platform has soared in relevance over the past few years, mainly thanks to r/WallStreetBets – the community responsible for the GameStop short squeeze. But, is this newfound relevance reason enough for you to invest in the Reddit IPO? Let’s examine.

Reddit’s IPO: What you need to know

Social media is a massive industry and some social media companies print money by showing highly-targeted ads to users. For investors, social media is also a fairly consolidated industry with only a handful of names to invest in. Here are the social media companies that are currently competing with Reddit for eyeballs:

• Meta Platforms (Nasdaq: META): The owner of Facebook, Instagram, WhatsApp, and Messenger.
• YouTube (Nasdaq: GOOG): The world’s largest video-sharing platform and second-largest search engine. Owned by Google.
• Snap, Inc (Nasdaq: SNAP): The owner of the popular photo-sending app, Snapchat.
• Pinterest: A popular photo-sharing social media app.
• X (Formerly Twitter): Privately owned by Elon Musk.
• TikTok: Privately owned.

Here’s how Reddit currently stacks up against the competition:

• Reddit’s Valuation: Reddit is seeking a valuation of $6.5 billion. Meanwhile, Meta Platforms is worth roughly $1.2 trillion, Snap is worth just under $20 billion, and Pinterest is worth $23 billion. This puts Reddit on the lower end of the spectrum compared to other social media platforms.

• Reddit’s User Base: Reddit reported having 267.5 million active weekly users and more than 100,000 active communities. While impressive, this still puts Reddit on the smaller side compared to the likes of Facebook, YouTube, Instagram, or TikTok. All of these platforms have roughly 1 billion users or more.

Takeaways From Reddit’s IPO Paperwork

I took the liberty of scanning the Reddit IPO paperwork for you. Here are the main takeaways:

• Reddit posted a 2023 revenue of $804 million, up from $666.7 million in 2022.
• Redditors tend to become more engaged on the platform as time passes
• 76% of people think that people post honest and truthful things on Reddit, according to an internal survey. This was higher than Facebook, Instagram, Snapchat, TikTok, X, and YouTube.

How Does Reddit Make Money?

The first question that all investors should be asking when deciding whether or not to invest in a company is: how does that company make money? In Reddit’s case, it makes 98% of its money from advertising. In general, this consolidation of revenue isn’t a great thing in a company that you’re going to invest in, since it means the company is not diversified. But, this type of consolidated revenue is pretty standard for social media companies.

Reddit has a three-step plan to acquire new revenue sources:

• Advertising: Reddit’s current primary revenue source.
• Data licensing: Reddit plans to start selling data for AI to be trained on (this phase of the plan is already underway).
• User economy: Over time, Reddit wants to expand and profit from its community of users by charging people to access the community (this phase is down the road). 

Right now, the most exciting part of the Reddit IPO is hearing more about its plans to leverage AI. Let’s talk more about that.

Reddit’s AI Run

With 1 billion posts and 16 billion comments as of December 2023, Reddit offers a plentiful data source for companies that want to train AI algorithms. Reddit is essentially a massive treasure trove of data that can be leveraged to train LLMs. Reddit is already capitalizing on this and has secured a deal with Google worth roughly $60 million per year. This deal will give Google real-time access to Reddit’s data.

Reddit feels so strongly about its data that it calls itself, “One of the internet’s largest open archives of human experiences.”

Another fun fact from Reddit’s IPO filing is that Sam Altman, CEO of OpenAI, owns roughly 7.6% of Reddit – more than CEO Steve Huffman. Apart from Altman, Reddit’s next biggest shareholders are Advance Publications (which owns Condé Nast) and Tencent.

Reddit IPO: Should You Invest?

I wouldn’t. Reddit has been around for 20 years and has never turned a profit. Yes, its revenue has been growing consistently for years. But, its user base is still fairly small compared to other social media platforms. This doesn’t seem like it will change anytime soon as it’s unlikely for people to suddenly start flocking to an older platform out of nowhere.

Additionally, I can say with certainty that Reddit is going to start slowly declining in popularity after going public. This is because public companies have an obligation to show shareholders increasing quarterly profits. This obligation means that Reddit’s management will be forced to come up with new ways to squeeze money from the platform. In most cases, this results in a worse experience for users.

Inevitably, Reddit will start implementing things like monthly subscriptions, paywalls to access certain communities, and paid account upgrades – all things that people hate. While these decisions might create a short-term bump in profits, they will ultimately discourage people from using the platform.

The Case Against Reddit and AI

With this Reddit IPO, the company is hoping to take advantage of the recent AI bull market and juice its valuation. But, is Reddit really a viable database of information that will be valuable to AI companies?

Reddit is pretty much entirely anonymous. Plus, a large bulk of its content is just comments reacting to news stories or other people’s posts. Yes, there are definitely valuable posts here and there. But, I’d argue that the large majority of Reddit’s content is just white noise. When you consider that it’s anonymous white noise, I get even more confused about how this could power AI algorithms.

That said, I’m not an expert on Large Language Models (LLMs). And, Reddit has already landed a major contract with Google which speaks to the viability of its data. But, I just don’t see how anonymous Reddit comments are really valuable for training AI.

Reddit IPO: Too Much Turbulence

If you’re going to invest in Reddit, that’s totally up to you. But, I’d at least wait until the turbulence from the IPO has settled down.

As a general rule of thumb, IPOs tend to be particularly volatile. It’s fairly common for IPO stocks to either soar or slump in value in the weeks after going public. This happens because it’s the first time that the company’s finances are made public and the market needs to work out how to value the company.

Reddit’s IPO might be particularly volatile for two reasons:

1. User Ownership: Reddit has set aside close to 2 million shares for moderators and users. This could negatively affect the stock if few users decide to buy it.
2. r/WallStreetBets: If this massive investing subreddit decides to go against Reddit then it could also be a massive headwind for the stock.

Many Redditors are unhappy that the company is going public. In fact, there have already been widespread boycotts related to the company management’s decisions. While it may be unlikely, there is a chance that Redditors will attempt to drive the stock’s price down so that it gets delisted and, ultimately, is taken private again. Again, this is unlikely – but not impossible.

I’m staying away from the Reddit IPO, but I’ll definitely be watching the stock closely to see what happens! If you’re interested in reading more, be sure to subscribe below to get alerted of new articles.

Disclaimer: This article is for general informational and educational purposes only. It should not be construed as financial advice as the author, Ted Stavetski, is not a financial advisor. Ted also does not own shares of Reddit.