Reddit: What You Need to Know Before Investing

Get the scoop on Reddit's IPO, financial challenges, moderator reliance, and leadership dynamics to decide if its the stock for you.
June 10, 2024
Unlock Free Stock Insights + 50% Off Discount Code!
Join thousands of savvy investors and get:
  • Weekly Stock Picks: Handpicked from 60,000 global options.
  • Ten Must-Have Stocks: Essential picks to hold until 2034.
  • Exclusive Stock Library: In-depth analysis of 60 top stocks.
  • Proven Success: 10-year track record of outperforming the market.
Sign up to our mailing list now and enjoy a 50% discount on premium services!
By submitting your email address, you consent to us keeping you informed about updates to our website and about other products and services that we think might interest you. You can unsubscribe at any time. Please read our Privacy Policy and Terms of Use.

Key Highlights

  • Moderator Dependence: Reddit relies heavily on unpaid moderators to manage its vast array of subreddits, posing operational risks as evidenced by recent moderator protests over API changes.
  • Financial Health: Despite substantial revenue, Reddit reported significant losses, with 55% of its revenue going into R&D. CEO Steve Huffman's high compensation package has also raised concerns among potential investors.
  • Leadership Dynamics: The relationship between co-founders Steve Huffman and Alexis Ohanian impacts Reddit's strategic direction, with notable tensions over content moderation and business priorities. 

Reddit, the internet's self-proclaimed "front page," has announced its plans to go public. For potential investors, understanding the intricacies of Reddit's business model, its challenges, and its growth trajectory is essential. Here's an in-depth look at the key factors surrounding Reddit's IPO, including its history, reliance on moderators, financials, and leadership dynamics.

A Brief History of Reddit

Reddit was founded in 2005 by Steve Huffman and Alexis Ohanian during their time at Y Combinator. Just a year later, it was sold to Condé Nast for $10 million. In 2011, Reddit spun off into an independent entity, and Huffman returned as CEO in 2015, after Ohanian rejoined in 2010. Over the years, Reddit has grown into one of the largest social media platforms, known for its diverse and vibrant communities called "subreddits."

The Role of Moderators

One unique aspect of Reddit is its reliance on unpaid moderators who manage the subreddits. These volunteers are crucial to the platform’s operation, enforcing community guidelines and maintaining the quality of content. However, this dependence poses significant risks:

  1. Moderator Strikes: In June 2023, thousands of subreddits went private as moderators protested changes to Reddit's API policy, which aimed to charge companies for data access previously available for free. Despite the protests, Reddit's management held firm on its decision.
  2. Risk Factors: Reddit's IPO filing acknowledges the potential disruptions caused by "actions or inactions" of volunteer moderators, highlighting the platform's vulnerability to internal strife.

To mitigate these risks, Reddit is offering a unique incentive: allowing moderators and active users to purchase shares at the IPO price, a privilege typically reserved for employees and early investors. However, moderators are highly skepticalof the offering.

Financial Overview

Reddit's financials reveal both its potential and its challenges:

  1. Revenue and Losses: Despite substantial revenue, Reddit reported an annual loss of $98 million. A significant portion of its spending, 55% of its revenue, goes into research and development (R&D), primarily on engineering and product development. This is notably high compared to other tech giants at their IPO stages.
  2. CEO Compensation: Steve Huffman's compensation package, worth $193.2 million in 2023, has raised eyebrows. Critics argue that such a high compensation is unwarranted given the company’s losses, suggesting that reducing executive compensation could improve profitability.
  3. Monetization Efforts: Reddit has ramped up its monetization efforts significantly since 2018, focusing more on ads. However, balancing these efforts with maintaining user satisfaction remains a delicate task. Reddit is eager to license its data to large language models (LLMs) like ChatGPT but users see this as a betrayal of their community.

Leadership and Internal Dynamics

Reddit's leadership dynamics, particularly the relationship between its co-founders, impact the company's culture and strategy:

  1. Huffman vs. Ohanian: Huffman and Ohanian, once close college roommates, have diverged in their visions for Reddit. Ohanian, who left the board in 2020 over disagreements on handling hate speech, was seen as the community's spiritual leader. Huffman, focused on business and profitability, has since taken steps to distance Reddit from Ohanian's legacy.
  2. Major Shareholders: Notable shareholders include Sam Altman, CEO of OpenAI, who owns 8.7% of Reddit. The Newhouse family and Tencent are also significant stakeholders, with 30% and 11% of the company, respectively.

The Future of Reddit

Reddit's IPO is a pivotal moment in its nearly two-decade journey. The company emphasizes its vast, constantly updating user-generated content as a critical asset, particularly valuable for training artificial intelligence models. This unique data advantage positions Reddit as a key player in the data-driven future.

However, potential investors should weigh the following:

  1. Reliance on Moderators: The ongoing dependence on unpaid moderators is a double-edged sword, offering both community authenticity and operational risks.
  2. Financial Health: High R&D spending and executive compensation amidst ongoing losses may concern investors looking for immediate profitability. Additionally, revenue growth remains reliant on user satisfaction, a difficult balancing act.
  3. Leadership Stability: The dynamic between Huffman and Ohanian, along with internal governance, will play a crucial role in shaping Reddit’s future.

In conclusion, investing in Reddit's IPO presents both exciting opportunities and significant risks. The platform’s strong community foundation, coupled with strategic monetization and data advantages, look like green shoots for growth. However, monetization efforts risk alienating users, an issue we’ve seen at other publicly listed social media companies. Without users, Reddit isn’t worth much.

As Reddit transitions into a public company, how it navigates these challenges will determine its success in the competitive social media landscape.

Should you invest $1,000 in Reddit right now?

Before you buy stock in Reddit, consider this:

MyWallSt founder Emmet Savage and his team of analysts have been successfully picking stocks for more than 25 years and their favorites are crowned Stock of the Month.

Unfortunately… Reddit hasn’t made the cut.

MyWallSt’s Stock of the Month service has more than quadrupled the return of the S&P since 2018* and will provide you with all the guidance you need to confidently build a market-beating portfolio.

Shopify became Stock of the Month in January of 2017 and has since returned 1323%*.

Join MyWallSt Invest Plus to enjoy Stock of the Month and other great benefits like:

  • Ten Foundational Stocks to hold until 2034
  • A new stock pitch each week from 60k worldwide
  • A ranked library of 60+ international stocks

Check Out Stock of the Month

*As of May 2024

Read More From MyWallSt:

Unlock Free Stock Insights +50% Off Discount Code!
Join thousands of savvy investors and get:
  • Weekly Stock Picks: Handpicked from 60,000 global options.
  • Ten Must-Have Stocks: Essential picks to hold until 2034.
  • Exclusive Stock Library: In-depth analysis of 60 top stocks.
  • Proven Success: 10-year track record of outperforming the market.
Sign up to our mailing list now and enjoy a 50% discount on premium services!
By submitting your email address, you consent to us keeping you informed about updates to our website and about other products and services that we think might interest you. You can unsubscribe at any time. Please read our Privacy Policy and Terms of Use.

The Home of Successful Investing.

© 2024 MyWallSt Ltd. All rights reserved.

Services

Content

Social

Company

Support

Resources

This website is operated by MyWallSt Ltd (“MyWallSt”). MyWallSt is a publisher and a technology platform, not a registered broker-dealer or registered investment adviser, and does not provide investment advice. All information provided by MyWallSt Limited is of a general nature for information and education purposes, and you should not construe any such information as investment advice. MyWallSt Limited does not take your specific needs, investment objectives or financial situation into consideration, and any investments mentioned may not be suitable for you. You should always carry out your own independent verification of facts and data before making any investment decisions, as we cannot guarantee the accuracy or completeness of any information we publish and any opinions that we publish may be wrong and may change at any time without notice. If you are unsure of any investment decision you should seek a professional financial advisor. MyWallSt Limited is not a registered investment adviser and we do not provide regulated investment advice or recommendations. MyWallSt Limited is not regulated by the Central Bank of Ireland. MyWallSt Limited may provide hyperlinks to web sites operated by third parties. Your use of third party web sites and content, including without limitation, your use of any information, data, advertising, products, or other materials on or available through such web sites, is at your own risk and is subject to the third parties' terms of use.