Reddit’s Initial Public Offering: Encouraging Beginnings, with Future Hurdles

Reddit, the social news platform provider, made its highly anticipated debut on the public market on March 21. They opened at $47 per share, well above its IPO price of $34 per share. By the end of its trading day, the stock closed at $50.44, signaling a bullish start for the company. Despite this promising beginning, Reddit faces significant challenges in its journey towards becoming a social media giant.

With an $8 billion market capitalization, Reddit’s value falls short compared to industry giants such as Meta Platforms (formerly Facebook), Pinterest, and Snap. While its IPO performance has generated hope among investors, questions linger about whether Reddit can emulate Meta’s expansion or suffer a fate similar to Snap, which struggles to justify its IPO valuation.

Central to Reddits strategy for generating revenue is its user base, which includes 73.1 million daily active unique users (DAUq) in the final quarter of 2023, with a substantial portion based in the United States. The platform aims to convert users into contributors by motivating them to create accounts and engage in content creation and conversations.

Despite the increasing number of users, Reddit acknowledges that there may be fluctuations or decreases in its user growth, citing factors such as the COVID-19 pandemic meme stock trends, geopolitical events, and shifts in entertainment preferences. These highlight how factors beyond its control can influence the platform.

Financial Performance and Comparison to Reddit

Like Meta and Snap, Reddit generates most of its revenue through advertising, with average revenue per user (ARPU) being a measure. However, Reddit has recently seen a slowdown in ARPU growth in the U.S. despite growth in international markets. The company attributes this deceleration to macroeconomic challenges impacting the advertising sector.

Although Reddit reported a 21% increase in revenue to $804 million last year and reduced its net loss, it is still unprofitable according to GAAP standards. Its financial performance is more similar to Snaps than Metas, leading to concerns about its path toward profitability compared to Meta’s profitability since going public.

Reddit’s Diversified Platform

Reddit’s unique position as a diversified news aggregator and discussion forum sets it apart from traditional social networks. It also exposes it to competition from various fronts, including search engines, commerce platforms, and emerging technologies like generative AI platforms.

In the future, Reddit aims for 20% revenue growth and to break even on adjusted EBITDA by 2024.

Yet the achievement relies on conquering obstacles such as broadening its network, enhancing user interaction, adjusting to advancing AI technologies, and maintaining the viability of its volunteer moderator program.

Even though Reddits public offering surge has sparked enthusiasm, investors are advised to assess its framework before committing to a prolonged investment. Without progress in tackling its hurdles, Reddit faces the prospect of not meeting its aspirations of competing with major industry players, such as Meta. This underscores the prudence of adopting a cautious stance when navigating its path post-IPO.