Why Reddit is 'walking a tightrope' with its IPO

By James Rogers

The social-media platform could find itself at odds with its loyal user base as it strives for profitability, says Jon Keidan, founder and managing partner of venture fund Torch Capital

Reddit's forthcoming IPO could put the social-media platform in a tricky position, according to Jon Keidan, founder and managing partner of venture fund Torch Capital.

"They are walking a tightrope, 100%," he told MarketWatch, highlighting potential tension between Reddit's loyal user base and the demands it will face as a public company. Reddit is inviting the users and moderators who have contributed to the social-media platform to buy shares in its IPO. However, the company is not yet profitable.

"The Reddit fans love Reddit. They are pretty dynamic, they are very protective of their community and they are protective of their platform," Keidan said. But a scenario could arise whereby the public markets force Reddit "to make proper financial and strategic moves" to get to profitability, he said, and that could put the company at odds with its user community.

Related: Why Reddit's IPO could offer an 'unprecedented' twist in meme-stock saga

"If that audience doesn't like what Reddit is doing, it could be a mass exodus of users," Keidan said. "Or it could be a mass manipulation of the stock."

Reddit, which is home to the WallStreetBets subreddit, played an important role in the meme-stock frenzy of 2021 that sent the stocks of AMC Entertainment Holdings Inc. (AMC) and GameStop Corp. (GME) skyrocketing. In its S-1 filing, Reddit even cited the popularity of WallStreetBets among retail investors as a risk to its stock price, which it said could experience "extreme volatility" for reasons unrelated to the company's "underlying business or macroeconomic or industry fundamentals." Effectively, this is an acknowledgment that it could itself become a meme stock.

Reddit's stock will trade under the symbol RDDT on the New York Stock Exchange, and its public debut is expected sometime in March.

Related: Reddit's offering marks return of 'junk stock IPO,' New Constructs says

"On a stock-price level, the key thing is that they are going to have to show stable growth on the revenue and a short-term path to profitability without losing their core user base, which they view as the heart and soul of the company," Keidan said. "It's doable if management has a very tuned ear to what their core user base wants, or how they feel."

Torch Capital, which was launched in 2018, is not an existing investor in Reddit.

According to its S-1 filing, Reddit has over 100,000 active communities, or subreddits, and in December 2023 it had average of over 60,000 daily active moderators. The company had 500 million visitors in December 2023, the filing said, and in the last three months of 2023, it had an average of 73.1 million daily active uniques.

Related: Reddit's IPO filing names WallStreetBets' 'popularity' as risk to stock price

Keidan, a former manager in the music industry, said he sees parallels among the Reddit community. "Coming from the entertainment world and working with artists, we have to think of Reddit's core audience as artists," he said. "There's a lot of good that comes with that. ... They are passionate, they are loyal, but they are also very opinionated, and you never know what they are going to think."

Reddit is targeting a valuation of $6.5 billion in its IPO, the Wall Street Journal reports, significantly below its previous valuation of $10 billion. "The reprice at $6.5 billion seems pretty fair," Keidan told MarketWatch. "It's a very well-known platform with a very loyal user base." He also cited the company's diversified revenue streams as a positive.

Reddit has not responded to a request for comment. Companies are not allowed to publicly comment on their IPOs before they start trading.

Related: Reddit publicly files IPO papers, detailing plans to license data, sell more ads and grow its 'user economy'

This week Don Montanaro, the president of retail brokerage Firstrade, told MarketWatch that Reddit's IPO is creating an "unprecedented" situation. "The meme-stock phenomenon has played out with stocks that were already out and listed for some time," he said. "Here we have the debate and the possibility of a stock being a meme stock before it's even public."

Independent equity-research firm New Constructs has warned investors to avoid Reddit's IPO. "Reddit's IPO marks the return of the junk IPO," New Constructs CEO David Trainer wrote in a note. "We think the company may never monetize its platform without angering its users, and the entire premise of Reddit is user-generated content. This business model is inescapably built on a catch-22: Make money or please users."

-James Rogers

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03-09-24 0804ET

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