I'm eligible for the Reddit IPO, but not sure I want it

On February 22nd, Reddit started inviting users and mods to invest in their IPO at the price they are offering to institutions in a way not typical to an IPO. I guess I have mixed feelings about investing in this.

WhY is the reddit IPO different?

For anyone not familiar with investing, IPOs are referred to “initial public offering” when a company goes public. A set of shares are usually made available to institutional investors to help a company raise money and are available to qualified transfers sand large funds and endowments who have the net worth able to qualify them. They decide to buy them up in large amounts in the initial pool at a fixed price and then when trading starts on public markets, they can either sell them to now the public depending on the terms if they wish where the rest of the retail (normal) traders get access to them.

When an IPO starts trading, they may see their IPO shares get sold to these institutions at a price say $20/share and then start trading less allowing retail to buy up shares much cheaper or they may open with a lot of hype an surge 100% or more and make the initial buys a lot of profit.

In recent offerings, Solowin Holdings (SWIN) started trading on September 7th, 2023 for an initial offering price of $4 and closed the first day just over $6. The stock now trades at $28 making 7x profits for anyone who is holding IPO shares. Around that same time, Inspire Veterinary Partners (IVP) had an offering at $4 and closed at $3 the first day losing money for anyone who bought the original shares. Today, their shares are trading at $0.05 netting a massive loss for any IPO buyers so you can see there is no sure thing about being early in IPOs.

The Reddit IPO Process

Reddit started sending out invites to users to offer them the same shares as investors in a reserved pool of shares. Their messaging was that as part of someone who helped grow their company, they want to directly offer shares to their users at this price. Below is a screenshot from the initial invite myself and reports are 75,000 other users got over the invite period to allow them to preregister for the IPO.

After the window closed on the 5th, they sent another wave of emails this morning that notified users who did qualify from the pre-register that they were accepted and they would be getting another email from E*Trade to create a new account to be able to buy shares. The strange part about this I have heard from other users as if you have an active account with them, you can not use that account and must use a new one for just this process. Not a red flag but just strange in the process.

Once you make it through the process and prove you are a US citizen and qualify their requirements, you are given a new account and the option to go in and offer the number of shares you want to buy. The max number of shares a Reddit IPO buyer can buy is 1000 so the max someone can invest here at the $34/share price is $34,000 per person.

Based on the process, you reserve the amount you want to buy based on the price and when it closes, you will be allocated the shares based on your balance. If you do not have funds to cover that in your account by the 18th, you will only get what you have funds in for, which is also a pain since you need to transfer over to this new trading account.

Am I buying the Reddit IPO?

TLDR: NO. Well, kinda no.

Why? I have been mulling over this offer for quite a bit until I saw the share price and have settled that I will not be buying this. I don’t mind taking shots at profit methods on stocks, options, and crypto where I think there is some hype and future however, after looking into Reddit, I just don’t think they can sustain profitability that Wall Street is looking for at least in the short term.

Reddit has lost money year over year and has taken investments as recently as its Series F in 2021 bringing its investments to almost $1 billion dollars and a projected valuation of $10-15 billion dollars. Last year, Fidelity cut the valuation almost 50% which now is where we sit in the $5-$6 billion market cap range.

This new wave of funding seems more to fund its hope of being the typical tech company where it is trying to find a way to make money. As Reddit adds users, it loses money and even thorugh they have shown positive growth, the new users dirving it aren’t the normal Reddit users that make accounts, stay on the site all day, and interact with communities.

A lot of the new savvy searching users are finding that Reddit is a good wealth of knowledge that is better than Google results in a lot of cases. Reddit has built some hype in the new money flow of selling their user data and information to AI companies who want to train models on conversational data but the only announced contract was pretty small in the grand scheme of things. This could be a way to licensed content as we start to see media companies and newspapers suing NVIDIA and OpenAI for copyright but still, seems like too far out to expect any short term returns here.

Also, te memory still sits with the fallout of users when Reddit charged for their API access. Third party apps like AlienBlue which I used daily and provided the best experience of Reddit has been shutdown due to the massive price that Reddit charges for API access, essentially killing third party applications. When I browse to Reddit now, I use the old.reddit.com URL to avoid all the new ads and don’t even use the iOS app that they use to track better metrics for users. Reddit even got so desperate during this window when they had users shutting down popular subreddits to protest that if they weren’t opened back up, Reddit would take over the community.

While I still think Reddit has a lot of information as a content source for companies looking to build AI models and analyze conversational data. I do wonder if we will see it spike anywhere positive the first few weeks since anything that mentions AI usually gets bought up in a frenzy but as we have seen with companies like BBAI that can grow and drop 30% over night, anything is possible here.

I will probably buy a few IPO shares to say I did get in on an IPO and just not touch for a while since they are in a while separate account. When shares start trading, we could see a spike upwards similar to what we saw with Facebook in the early IPO days when everything thought we were going to get Ferrari’s with our profits and never happened until a decade later when the company kept inventing and becoming a massive powerhouse and profit machine.

Longer term, I think I am going to watch the trading start and expect we see and hold long term but I think my strategy here is to wait until the collapse of the price in the 50% ($10-20) range and start to buy up shares in the retail markets and not on the IPO offering. There is no share lock up for the DSP users that would prevent someone from selling day one which could open me up to buy a bit more and dump if things go south but overall, I just don’t think we will see much of a launch of the Reddit IPO and it turn into a 100% gain in the short term until they figure out their business model a bit better.

WallStreetBets is determined to tank it however, they are the most massive Reddit community and active users so is a double edged sword.

Disclaimer: This is not financial or investment advice, this is just my thoughts around the Reddit IPO offering as a long term user and someone eligible to purchase IPO shares.