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Reddit's stock saw a rapid decline after its Wall Street debut, dropping nearly 30% in just three sessions before a partial rebound.
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Despite the bounce-back, Reddit's trajectory remains uncertain, with potential challenges ahead as it navigates its post-IPO journey.
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Questions have been raised about its unconventional listing approach, growth prospects, and ability to maintain its core values as it aims to generate growth.
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Following its debut on Wall Street at $34 per share, Reddit (NYSE:RDDT) stock plummeted by almost 30% in just three sessions, from March 27 to April 1.
However, the stock then rebounded on Tuesday, pushing its value back above $50 per share briefly, before it settled below that level.
Just like the stock's seesaw action, Reddit's future, too, remains uncertain, with potential challenges ahead mirroring its tumultuous journey thus far.
Let's have a look at the company's fundamentals to understand whether it is worth buying it.
Reddit's Rollercoaster Journey: From Startup to IPO and Beyond
Web developer Steve Huffman and entrepreneur Alexis Ohanian founded Reddit in 2005. The company was sold to Condé Nast in 2006 and returned to Huffman's ownership in 2015.
By 2021, Reddit's value had soared to about $10 billion during a funding round. The San Francisco-based company had confidentially filed for an initial public offering (IPO) with the SEC that same year.
In 2021, Reddit made headlines when its community orchestrated a massive spike in GameStop Corp (NYSE:GME) stock, driving up its price and causing significant losses to investors who had bet against the video game company.
Despite its achievements, Reddit has faced challenges in recent years, particularly in advertising revenue due to the rise of other social media platforms.
As a result, the much-anticipated IPO didn't happen until March 2024, with a valuation of nearly $6.5 billion, significantly lower than in 2023.
Despite these challenges, documents filed with the U.S. authority reveal that Reddit's revenues increased by 20 percent last year, while losses dropped to $90 million.
The company has attracted interest from major tech firms like Alphabet (NASDAQ:GOOG), which reportedly struck a multi-trillion-dollar deal with Reddit to access its users' data.
Among Reddit's major shareholders are OpenAI CEO Sam Altman, as well as Tencent (HK:0700) from China, and the publishers of Advance Magazine.
Additionally, Reddit received significant support from the government's move to ban TikTok in the US, its main competitor.
What Lies Ahead for the Social Media Company?
Investors should focus on several key factors amidst Reddit's rise, including its unconventional approach and its handling of the U.S.-China trade tensions.
Firstly, Reddit's unique listing approach, which reserves 8% of its shares for users and moderators, has raised eyebrows. This move exposes the company to potential volatility by placing a significant portion of its stock in the hands of non-professional investors.
Furthermore, Reddit's growth prospects are under scrutiny. While it ended 2023 with 73.1 million daily active unique users, up 27% from the previous year, concerns arise from stagnant new user access.
Despite maintaining 500 million monthly site visitors over the past two years, Reddit's average revenue per user in the U.S. dropped by 7% in the fourth quarter.
To achieve sustained growth, Reddit aims to expand beyond its predominantly English-speaking audience, with 90% of its content currently in English.
Gaining traction in Europe, where it lacks the same recognition as in the U.S., presents a significant challenge.
Reddit also faces the ongoing challenge of managing inappropriate content on its platform, which has historically caused issues. Convincing investors of its credibility and ability to regulate such content is crucial for long-term success.
Most importantly, Reddit must reassure its loyal community that its core values, centered on freedom of expression, remain unchanged post-IPO.
Maintaining user support amidst its transition to a publicly traded company will be pivotal for Reddit's future success.
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Disclaimer: The author holds long positions in Paypal, S&P 500 and Nasdaq. This article was written for informational purposes only; it does not constitute a solicitation, offer, advice, counseling or recommendation to invest as such it is not intended to incentivize the purchase of assets in any way. I would like to remind you that any type of asset, is evaluated from multiple points of view and is highly risky and therefore, any investment decision and the associated risk remains with the investor.