The IPO Buzz: Reddit’s Long-Awaited IPO Filing Puts AI & Ads on Center Stage

Finally: Reddit Inc. (RDDT Proposed) pulled back the curtain to reveal its plans for going public with its S-1 filing on Thursday afternoon (Feb. 22, 2024). The San Francisco-based social media company, whose r/Wall Street Bets subreddit drove the “meme stock” madness during the pandemic, did not disclose terms for its IPO. Reddit, founded in 2005, is selling itself on the golden twin pillars of AI and ads. (More on that in a moment.)

This is the first big tech IPO of the year – and it’s a New York Stock Exchange listing – a coup for the Big Board in its rivalry with the tech-centric NASDAQ. Reddit will set its IPO terms in a later filing. The deal is likely to launch in March.

The placeholder figure is $100 million. But Wall Street pros expect that the IPO will raise about five to seven times that – and give Reddit a valuation of at least $5 billion. That market cap would be roughly half of Reddit’s valuation of over $10 billion in August 2021 after a private fund-raising round led by Fidelity Management & Research, according to Pitchbook. To date, Reddit has raised about $1.38 billion, according to Bloomberg. Reddit filed confidential IPO documents with the SEC on Dec. 16, 2021.

Morgan Stanley, Goldman Sachs, J.P. Morgan, BofA Securities, Citigroup, Deutsche Bank Securities and MUFG are the joint book-runners.

AI and Ad Dollars

AI and Reddit are symbiotic – as the news this week and the S-1 filing indicate.

Reddit reached a $60 million-a-year deal with Google to make Reddit’s “content available for training the search engine giant’s artificial intelligence models, three people familiar with the matter said,” Reuters reported on Wednesday.

“The deal underscores how Reddit, which is preparing for a high-profile stock market launch, is seeking to generate new revenue amid fierce competition for advertising dollars from the likes of TikTok and Meta Platform’s (META) Facebook,” Reuters reported.

And who is among those who will benefit the most from Reddit’s IPO?

Sam Altman, for one. Altman, the founder and CEO of OpenAI, the home of ChatGPT, “has invested at least $60 million in Reddit shares,” CNBC reported.

Altman, a former Reddit board member, holds a pre-IPO stake of 9.2 percent of the voting power of Reddit’s outstanding stock, the prospectus says.

Reddit sees Altman’s ChatGPT as a competitor, the prospectus says.

Advertising is Reddit’s “first business,” the company says in the S-1 filing.

But Reddit has never turned a profit. The company has a history of net losses since its inception, according to the S-1.

For the year 2023, Reddit reported a net loss of $90.8 million on revenue of $804.0 million, according to the company’s S-1 filing. In 2022, Reddit’s net loss was $158.6 million on revenue of $666.7 million.

With 73.1 million daily average users (DAU), Reddit offers advertisers an “unduplicated, authentic and attentive audience in an attractive demographic,” the prospectus says. Based on Comscore data, 41 percent of that audience is between the ages of 18 and 34; 50 percent is male, and 64 percent has a household income of $75,000 or more. And here’s a golden fact: Large segments of this group were not active on Facebook, Instagram, Snapchat, TikTok and X (formerly Twitter), the prospectus says

VCs and Karma

Reddit’s IPO “could be 2024’s first major test of the market for a technology startup backed by venture capital,” Bloomberg reported on Thursday.

This may possibly be the first time that “karma” has appeared in an IPO filing.

Reddit plans to reserve shares in the IPO for its 75,000 most prolific users through a directed share program, The Wall Street Journal reported two days ago.

“User contributions will be measured in karma (a user’s reputation score that reflects their community contributions),” the prospectus says.

Some of the reaction to that news on r/Wall Street Bets was scathing.

Born In A Dorm

If Reddit were a person, it would be old enough to vote. The 18-year-old social messaging company was founded in 2005 by Steve Huffman and Alexis Ohanian in their University of Virginia dorm room. Huffman is Reddit’s CEO. Ohanian may be better known to some as the husband of tennis legend Serena Williams.

Conde Nast Publications, the home of Vogue and Vanity Fair magazines, bought Reddit in 2006. The same year, Reddit hosted its first AMA (“Ask Me Anything”) event. Fast forward to 2012, when President Barack Obama did an AMA, according to a Reddit timeline in the prospectus.

Advance Magazine Publishers, Inc., Conde Nast’s parent company, spun off Reddit in 2011.

Reddit seems a little bit self-conscious – for a social media company – about its lack of profitability during its 18 years in business so far. The company attempts to explain the red ink on its bottom line in some well-chosen words in the “Risk Factors” section of the prospectus.

“We did not begin meaningful monetization efforts at Reddit until 2018, and we are currently exploring new strategies for monetization,” the prospectus says.

Stay tuned.

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