After many years in business, Reddit (Nyse: RDDT) has finally decided to go public making it the primary social media to accomplish that since Snap (Nasdaq: SNAP) in 2017. This 20-year-old social media platform has soared in relevance over the past few years, mainly because of r/WallStreetBets – the community accountable for the GameStop short squeeze. But, is that this newfound relevance reason enough for you to take a position within the Reddit IPO? Let’s examine.

Reddit’s IPO: What it is advisable know

Social media is a large industry and a few social media corporations print money by showing highly-targeted ads to users. For investors, social media can also be a reasonably consolidated industry with only a handful of names to take a position in. Listed below are the social media corporations which are currently competing with Reddit for eyeballs:

• Meta Platforms (Nasdaq: META): The owner of Facebook, Instagram, WhatsApp, and Messenger.
• YouTube (Nasdaq: GOOG): The world’s largest video-sharing platform and second-largest search engine. Owned by Google.
• Snap, Inc (Nasdaq: SNAP): The owner of the favored photo-sending app, Snapchat.
• Pinterest: A preferred photo-sharing social media app.
• X (Formerly Twitter): Privately owned by Elon Musk.
• TikTok: Privately owned.

Here’s how Reddit currently stacks up against the competition:

• Reddit’s Valuation: Reddit is looking for a valuation of $6.5 billion. Meanwhile, Meta Platforms is value roughly $1.2 trillion, Snap is value slightly below $20 billion, and Pinterest is value $23 billion. This puts Reddit on the lower end of the spectrum in comparison with other social media platforms.

• Reddit’s User Base: Reddit reported having 267.5 million energetic weekly users and greater than 100,000 energetic communities. While impressive, this still puts Reddit on the smaller side in comparison with the likes of Facebook, YouTube, Instagram, or TikTok. All of those platforms have roughly 1 billion users or more.

Takeaways From Reddit’s IPO Paperwork

I took the freedom of scanning the Reddit IPO paperwork for you. Listed below are the major takeaways:

• Reddit posted a 2023 revenue of $804 million, up from $666.7 million in 2022.
• Redditors are likely to develop into more engaged on the platform as time passes
• 76% of individuals think that individuals post honest and truthful things on Reddit, in accordance with an internal survey. This was higher than Facebook, Instagram, Snapchat, TikTok, X, and YouTube.

How Does Reddit Make Money?

The primary query that each one investors ought to be asking when deciding whether or not to take a position in an organization is: how does that company earn a living? In Reddit’s case, it makes 98% of its money from promoting. On the whole, this consolidation of revenue isn’t a terrific thing in an organization that you simply’re going to take a position in, because it means the corporate will not be diversified. But, any such consolidated revenue is pretty standard for social media corporations.

Reddit has a three-step plan to accumulate latest revenue sources:

• Promoting: Reddit’s current primary revenue source.
• Data licensing: Reddit plans to begin selling data for AI to be trained on (this phase of the plan is already underway).
• User economy: Over time, Reddit desires to expand and take advantage of its community of users by charging people to access the community (this phase is down the road). 

Without delay, essentially the most exciting a part of the Reddit IPO is hearing more about its plans to leverage AI. Let’s talk more about that.

Reddit’s AI Run

With 1 billion posts and 16 billion comments as of December 2023, Reddit offers a plentiful data source for corporations that need to train AI algorithms. Reddit is actually a large treasure trove of information that might be leveraged to coach LLMs. Reddit is already capitalizing on this and has secured a take care of Google value roughly $60 million per 12 months. This deal will give Google real-time access to Reddit’s data.

Reddit feels so strongly about its data that it calls itself, “Considered one of the web’s largest open archives of human experiences.”

One other fun fact from Reddit’s IPO filing is that Sam Altman, CEO of OpenAI, owns roughly 7.6% of Reddit – greater than CEO Steve Huffman. Other than Altman, Reddit’s next biggest shareholders are Advance Publications (which owns Condé Nast) and Tencent.

Reddit IPO: Should You Invest?

I wouldn’t. Reddit has been around for 20 years and has never turned a profit. Yes, its revenue has been growing consistently for years. But, its user base remains to be fairly small in comparison with other social media platforms. This doesn’t look like it would change anytime soon because it’s unlikely for people to suddenly start flocking to an older platform out of nowhere.

Moreover, I can say with certainty that Reddit goes to begin slowly declining in popularity after going public. It’s because public corporations have an obligation to indicate shareholders increasing quarterly profits. This obligation implies that Reddit’s management will probably be forced to provide you with latest ways to squeeze money from the platform. Most often, this ends in a worse experience for users.

Inevitably, Reddit will start implementing things like monthly subscriptions, paywalls to access certain communities, and paid account upgrades – all things that individuals hate. While these decisions might create a short-term bump in profits, they are going to ultimately discourage people from using the platform.

The Case Against Reddit and AI

With this Reddit IPO, the corporate is hoping to benefit from the recent AI bull market and juice its valuation. But, is Reddit really a viable database of data that will probably be precious to AI corporations?

Reddit is just about entirely anonymous. Plus, a big bulk of its content is just comments reacting to news stories or other people’s posts. Yes, there are definitely precious posts here and there. But, I’d argue that the big majority of Reddit’s content is just white noise. When you concentrate on that it’s anonymous white noise, I get much more confused about how this might power AI algorithms.

That said, I’m not an authority on Large Language Models (LLMs). And, Reddit has already landed a serious contract with Google which speaks to the viability of its data. But, I just don’t see how anonymous Reddit comments are really precious for training AI.

Reddit IPO: Too Much Turbulence

In case you’re going to take a position in Reddit, that’s totally as much as you. But, I’d a minimum of wait until the turbulence from the IPO has settled down.

As a general rule of thumb, IPOs are likely to be particularly volatile. It’s fairly common for IPO stocks to either soar or slump in value within the weeks after going public. This happens since it’s the primary time that the corporate’s funds are made public and the market must work out value the corporate.

Reddit’s IPO could be particularly volatile for 2 reasons:

1. User Ownership: Reddit has put aside near 2 million shares for moderators and users. This might negatively affect the stock if few users resolve to purchase it.
2. r/WallStreetBets: If this massive investing subreddit decides to go against Reddit then it is also a large headwind for the stock.

Many Redditors are unhappy that the corporate goes public. In truth, there have already been widespread boycotts related to the corporate management’s decisions. While it could be unlikely, there’s a likelihood that Redditors will try to drive the stock’s price down in order that it gets delisted and, ultimately, is taken private again. Again, that is unlikely – but not inconceivable.

I’m staying away from the Reddit IPO, but I’ll definitely be watching the stock closely to see what happens! In case you’re desirous about reading more, be sure you subscribe below to get alerted of latest articles.

Disclaimer: This text is for general informational and academic purposes only. It mustn’t be construed as financial advice because the creator, Ted Stavetski, will not be a financial advisor. Ted also doesn’t own shares of Reddit.

Ted Stavetski is the owner of Do Not Save Money, a financial blog that encourages readers to take a position money as a substitute of saving it. He has five years of experience as a business author and has written for corporations like SoFi, StockGPT, Benzinga, and more.