Why Reddit faces a difficult IPO

By James Rogers

'It's not an easy one,' says Alan Vaksman, founding partner of venture fund Launchbay Capital

Reddit's looming initial public offering will be far from straightforward, according to Alan Vaksman, founding partner of venture fund Launchbay Capital.

"I think it's a difficult one," Vaksman told MarketWatch. "I wish them absolutely the best of luck, but it's not an easy one."

At the moment, companies in the social-media sector are judged by their ability to monetize as opposed to the size of their user base, Vaksman explained. Reddit, however, is not yet profitable.

"Anything that does not comply to standard financial matrices, the market is quite harsh [towards]," he said. "The market now likes a solid business model that is growing and results in sustainable profit. Reddit doesn't have that at the moment."

Related: Reddit launches IPO at a valuation of up to $6.4 billion, with deal expected to price next week

Even digital-marketing company Klaviyo Inc. (KVYO), which has strong economics, saw its shares fall following its IPO last year, Vaksman noted.

Launchbay Capital does not have a position in Reddit, he said.

Reddit is inviting users and moderators who have contributed to the social-media platform to buy shares in its closely watched IPO. Users and moderators who created an account on or before Jan. 1, 2024, and are "in good standing" are potentially eligible for the directed-share program, the company said in its S-1 filing.

Related: Why Reddit is 'walking a tightrope' with its IPO

But Vaksman said that similar moves from Robinhood Markets Inc. (HOOD) and Deliveroo Plc (UK:ROO) resulted in post-IPO volatility. "The history of that strategy looks more like PR to me than something that will support the valuation in the long term," he told MarketWatch. "It creates this short-term volatility."

Reddit is also home to the WallStreetBets subreddit, which played an important role in the meme-stock frenzy of 2021 that sent stocks like GameStop Corp. (GME) and AMC Entertainment Holdings Inc. (AMC) 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 Reddit could itself become a meme stock.

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

Vaksman also noted that while the broader IPO environment is not as harsh as in 2022 or 2023, this is still not an easy time to go public. "We have still got high interest rates," he said. "The money is not free."

In an amended filing earlier this week, Reddit said it plans to offer 22 million shares at a price range of $31 to $34. At the top of the price range, including potential vested options and restricted stock units, the company's total share count would be 188.7 million shares, valued at $6.4 billion.

In addition to its role as a venture fund, Launchbay also has a data platform for secondary analysis. Based on data from the platform, the most recent secondary-market private trading values Reddit at $27 to $28 a share, for a total market valuation of approximately $4.4 billion to $4.5 billion.

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

Reddit's stock will trade under the symbol "RDDT" on the New York Stock Exchange. Its public debut is expected sometime in March, according to equity-research firm New Constructs.

-James Rogers

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03-13-24 1418ET

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