Any IPO is a major moment in time for a brand. But for Reddit, the upcoming IPO means so much more, to so many more.
Predictions often say that what happens on 21 March is a litmus test. Not just for the value of challenger, loss-making, advertising-based social media companies, or even for their viability with investors. Instead, it’s a test for the IPO market itself.
If done successfully — and if they are able to convince institutional investors there is tangible value in their model — this could be a turning point in a lackluster IPO landscape.
But it comes with great risk, and not just for the stock price. The very future of the platform is potentially in question.
A big bet
The IPO market isn’t looking particularly healthy right now, having largely “slumped” for the past two years.
Whether you blame the post-pandemic market or the SPAC-palooza that saw many brands try to circumvent the market to go direct to investors (often with poor results), there’s no denying that IPOs don’t exactly thrill the market like they once did.
Enter: Reddit. The social forum is both buzzy (which could be seen as a translation for loss-making but high-value) and has a long history. For many of its highly engaged users, it’s part of the very infrastructure of the internet. It remains incredibly popular, despite growing competition.
All of this makes its IPO a lightning rod for attention, from professional market speculators to armchair enthusiasts. The IPO is already (reportedly) massively oversubscribed — traditionally a good sign. But with a stock price-to-sales multiple of 8x, it’s a tough sell to both institutions and retail investors alike in the medium — and that’s before we get to the net loss of $90 million posted last year.
If Reddit can not just secure good day-one performance, but maintain it for the longer term, then there’s potentially a bigger knock-on effect for IPO confidence. If it can’t… then we can very much expect more of the same, at least until the next big bet.
Making money
One major element pulled out from the S-1 filing is that Reddit is planning to significantly open up its platform to advertisers, creating new tools and capabilities in order to try and generate more revenue.
In short: the markets are on the march, and they are coming for your subreddits.
Reddit has spent a good few months in advance of the IPO bolstering its ad sales team, indicating a big push to aggressively pitch agencies and advertisers to send more dollars their way. This is a common tactic, but it’s a hard goal to achieve.
Look at the numbers: its pool of daily active users is tiny compared to its competitors — just 73 million up against Meta’s all-encompassing 3.19 billion DAUs, or even perennial upstart Snap’s 414 million DAUs. This is before we get to new-kid-on-the-block TikTok’s 1.6 billion MAUs (DAUs aren’t available).
It’s a steep hill to climb, especially in an environment where it is incredibly difficult to scale an ad business.
To counteract this, Reddit has gone all-in on contextual advertising. By targeting groups versus individuals, with ads that are in the context of the conversation they are participating in, Reddit believes it can offer greater ROI.
It’s a good concept. But it doesn’t seem to address platform issues, such as how an ad on a subreddit doesn’t seem to give the advertiser a lot of reliable and/or actionable information about buying intent. The key here will be in how they crack measurement.
Keeping users happy
Across the financial sector and beyond, the GameStop and memstock saga still looms large.
With the IPO fast approaching, those same prolific r/WallStreetBets posters that took on hedge funds have now turned their attention to the very platform they organize on. Thousands of the subreddit’s members have already voted their intention to short the stock.
The good news here is that Reddit has already done a good job of keeping its users engaged — and rewarded — in the IPO run up, including holding 8% of shares for its most prolific users. This keeps them not only engaged but also gets them to buy into Reddit’s plans for a public future.
The truth of the matter is that no matter how unhappy users are with the increased focus on advertisers’ needs (rather than their own), a mass exodus is unlikely. For the hardcore users, it’s part of their life, almost a utility. It’s hard to disconnect with something so ingrained.
If the experience worsens, losing existing users won’t be the biggest problem for Reddit — it will be attracting new ones that becomes the larger issue. Something which will have a bigger impact on market performance.
The beginning, or the end?
How Reddit handles the IPO is the immediate issue — whether it can persuade the market that its plans aren’t just ambitious, but realistic. Whether it can really deliver shareholder value.
But this focus on performance will also need to strike a very delicate balance between the needs of advertisers and users. This isn’t an easy tightrope to walk, but it will determine whether this is the end of the beginning for the platform or the beginning of the end.
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