Reddit, birthplace of the meme stock, is going public. Here's what to expect

When Reddit goes public later this month, it will be the first major tech company — let alone social media platform — to do so in years.

The popular discussion forum site is aiming for a target valuation of up to $6.4 billion US when it launches its initial public offering (IPO) on the New York Stock Exchange, giving the public an opportunity to invest in the company's stock for the first time.

Pinterest was the most recent of the early-generation social media companies to go public back in 2019.

Reddit is currently owned by a handful of executives, including: CEO Steve Huffman and COO Jennifer Wong; several companies, such as the media firm Advance Publications; and other individual investors, like OpenAI CEO Sam Altman, who served on the company's board for a time and owns a considerable stake of its shares.

The platform, which launched in 2005 as part of the first wave of social media, has since become one of the world's most visited websites — beating even Amazon.com's daily traffic.

 

Why it took so long for Reddit to go public

After years of circling around an IPO, Reddit first tried to go public in December 2021, filing an S-1 form with the U.S. Securities Exchange Commission. At the time, the company had a valuation of $10 billion US.

But the listing was pushed back and it eventually fizzled out in early 2022 due to several compounding factors: the U.S. economy was in rough shape, Russia had launched its invasion of Ukraine and the Fed decided to raise its key interest rate.

Plus, "internally, they weren't quite ready," said Paresh Dave, a senior writer at tech outlet Wired. "They had to do all these audits, they had to make sure that they could do their accounting on time. And having some of those things in place just hadn't been a priority for so long that it took a while to get all that sloppiness out of the picture."
 

That's because the company had been dealing with issues related to content moderation, making it difficult for Reddit to invest in its ad business, he added.

The site relies on users who volunteer as moderators called "mods" to make sure other Redditors follow guidelines — a uniquely non-obtrusive approach to online content moderation that also gives mods the power to destabilize the site.

That's precisely what happened last summer, when many of the site's mods restricted or locked their popular subreddits in protest of Reddit's plan to charge businesses for access to its application programming interface (API).

The API, which lets users download and exchange data, is used by moderators to help them navigate the site. But it's also a goldmine for companies who want to cash in on Reddit's treasure trove of data (more on that later).

Some Reddit users are worried that the IPO will change the site's user experience, and that the company hasn't proven it can properly monetize the website.

"Reddit is just a very useful resource to so many people, and people want to see it preserved, but there's still the question over whether going public will change that and change that nature and change that usefulness of Reddit because they'll be focused on other priorities potentially, like growing their share price," Dave said.

Some U.S. Redditors can buy at the IPO

The company has proposed what's called a directed share program (DSP), which allows a select group of people to buy the stock at its initial price on the day of the IPO. Reddit's DSP has drummed up excitement because it gives some of its most active users access to the program, too.

Reddit has reserved eight per cent of the total IPO shares for eligible users and mods, plus certain board members and friends and family members of its employees and directors, according to Reuters. The company anticipates that the IPO shares will be priced between $31-$34 US.

There's one catch: Canadians can't take part in the DSP, as Reddit user Brennan Valenzuela recently learned the hard way. The Toronto-based customer experience manager received a message from Reddit inviting him to participate — but his dreams were dashed when he read the fine print.

"I had no idea that just being a part of the Reddit community afforded the opportunity to be able to buy in at the IPO. So I was really excited until I got to about the second paragraph, where I read it was only open to U.S. residents," Valenzuela said.

CBC reached out to Reddit for more information, but was told that "for legal reasons, we cannot say anything more than what's in the S-1."

Valenzuela, who has been an active Reddit user for a decade, said he isn't concerned about the user experience changing after the IPO — and he might buy the stock after the company has listed.

"I'm interested. I would buy a little bit and then see where they're going before I make a bigger commitment," he said.

But Reddit has a notoriously rowdy community of retail investors — a potential risk that the company acknowledged in its filing.
 

WATCH | How r/wallstreetbets drove up stock prices:
 
Hedge fund managers have been stung badly by a bunch of amateur online investors who worked together to drive up the price of struggling video game retailer GameStop and other dark horse stocks.

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Its r/wallstreetbets subreddit was the birthplace of the "meme stock" trend, when a small army of individual users banded together to drive up the stock price for the electronics company GameStop and the entertainment company AMC — undercutting more experienced investors' attempts to short the stocks.

"There's a fear that maybe that happens with Reddit, too, if these users sort of get excited about it. So all of that volatility is certainly a risk to going public," said Dave.

Touting ad potential, selling content to feed AI

Reddit generates most of its revenue — 98 per cent of it, in the last two years — from advertising sales, according to the S-1. But it's facing stiff competition in advertising revenue from other social platforms like TikTok.

The company hasn't been profitable in its nearly 20 years of existence, a fact that the filing acknowledged as a risk. "We have a history of net losses and we may not be able to achieve or maintain profitability in the future," it reads.

"I do think for a company like this that's been unprofitable for such a long time that it's probably good to come into the public markets and add a little bit of pressure to the business," said Shane Obata, a portfolio manager at Middlefield Group in Toronto. "And what I mean by that is the constant drive for profitability or else be punished by the market."
 

WATCH | Obata explains what AI firms see in Reddit's data:
 
Shane Obata, a portfolio manager with Middlefield Group in Toronto, explains what an IPO will do for Reddit and why the company could be a goldmine for artificial intelligence firms.

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The company's 100,000 subreddits, which are dedicated to niche interests and communities, are ripe for what's called contextual advertising — a camping gear advertiser might choose to target users in the r/camping subreddit, for example, per the S-1 — rather than behavioural advertising, which targets users based on personal data.

"That should allow for very high efficiency targeting [in] the sense that they're already interested and oftentimes they're going to have a high purchase intent," said Obata.

Amid the IPO announcement, Reddit is also looking to generate revenue from other sources beyond advertising. The social media platform reportedly struck a content licensing deal with Google, which would allow the tech giant to use Reddit's data to train its artificial intelligence models.