Reddit’s Rocky Road to a 2023 IPO
Social media darling Reddit is reportedly gearing up to hit the public market in the back half of this year, after confidentially filing to go public way back in December 2021. Super-high-profile IPOs have been hard to come by these days, and that’s been for good reason.
The most obvious one is the unfavorable market and macroeconomic environment of last year spilling over into 2023. When Reddit first filed for IPO in December 2021, it made sense. The stock market was seeing double-digit returns, corporate earnings were up, and interest rates were low. That kind of backdrop was fertile ground for IPOs, and 2021 was a record-breaking year.
Then things took a sharp turn in 2022 with high inflation, rising interest rates and a war in Ukraine. There were only 71 IPOs that raised a total of $7.7 billion in 2022, which marked the slowest year by proceeds in 30 years, according to Renaissance Capital. And things aren’t looking particularly great in 2023, either.
In the best-case scenario, it typically takes companies some six to nine months from filing to actually IPO, so the timing could not have been worse for Reddit. The market was certainly at its worst in the summer of last year.
But there’s still so little visibility into what the second half of this year will look like, and timing this kind of market wouldn’t be very smart. With inflation proving not to be transitionary, interest rates still rising and geopolitical tensions persisting, it’s hard to imagine a situation in which conditions would improve enough in the back half of this year to warrant a unicorn IPO.
Especially because Reddit, like other social media companies, also relies heavily on advertising. With companies pulling back on overall spending, advertising budgets are usually the first to get axed. Various companies that have ad businesses have said in recent quarters they have seen a meaningful decrease in ad revenue as a result.
According to Business of Apps, a company tracking the app industry, Reddit has about 52 million daily active users and 430 million monthly active users. The company generated roughly $350 million in 2021, largely from its ad biz. That’s small potatoes compared with its competition: Meta earned more than $32 billion in revenue as of Q4 2022, and Snap reported $1.3 billion.
Furthermore, much of the IPO roadshow is about convincing investors your company is worth investing in, and proving you can make money is a key aspect — kind of hard for a company having trouble being profitable.
In addition to ad revenue, Reddit receives some recurring revenue through a $5.99-per-month ad-free premium subscription. Though it’s unclear how many users actually pay for the service, some outlets estimated around 334,000 subscribers in 2021.
Reddit is known in the industry as having the lowest value per user versus its rivals, which doesn’t bode well for convincing investors to give you money, particularly at a time when many are trying not to spend.
Reddit’s private valuation has been declining. At the time of its IPO, it sought a valuation of more than $15 billion, $5 billion higher than its most recent estimate of $10 billion in August 2021. Since then, Fidelity Investments lowered its valuation of Reddit shares, from $61.80 in 2021 to $37.46 at the end of 2022.
Social media is a tough business and has also been under a lot of regulatory scrutiny as of late. Aside from content moderation concerns, Reddit had already faced scrutiny on Capitol Hill in relation to the rise and fall of meme stocks that gained popularity on the social media platform. A public company would have a lot more to answer to, and as VIP+ has previously outlined, regulatory fights are very costly.
In all honesty, aside from the benefit of a big capital raise through an IPO, the headaches that could follow just don’t seem worth it for Reddit. Staying as a private company insulates it from dealing with drama from shareholders and even lawmakers. At the very least, holding off on an IPO for the rest of this year would probably be in its best interest.
