Should investors buy Reddit stock? 4 things to know consider as the social media company IPOs

Reddit stock will begin trading on Thursday, with an initial public offering priced at $34 per share.

The social media company and its shareholders are looking to raise almost $748 million. Meeting that goal — or selling 22 million shares for $34 — would give the company a market value of $6.5 billion. The IPO was formally priced on Wednesday evening, and trading begins Thursday on the New York Stock Exchange.

Investors, Redditors, and some analysts have been skeptical about how well Reddit stock will perform in its highly anticipated IPO, the first by a social media company since Pinterest went public in 2019. At the same time, some indicators point to the potential for big gains.

Here’s what you should know about the Reddit IPO before trading begins.

Reddit isn’t profitable — but its losses are shrinking 

Reddit hasn’t turned a profit since it was founded in 2005. The social media site posted a loss of $91 million in 2023, according to the company’s IPO filing with the Securities and Exchange Commission.

But the losses are getting slimmer. The company’s total loss shrunk 43% between 2022 and 2023, when Reddit started charging fees to third-party developers using its application programming interface (API). The move sparked outrage among Redditors, but their protests had little effect. Reddit sales increased about 21% to $804 million last year.

Reddit is not alone in going public before swinging a profit. Allbirds, Casper Sleep, Rent the Runway, and Robinhood were among a large group of money-losing companies to go public in the pandemic-era IPO frenzy. Tech companies that went public during that time largely floundered. Reddit, at least, shows revenue growth.

Reddit’s IPO is four to five times oversubscribed

Reuters, citing unnamed sources familiar with the matter, has reported that Reddit’s initial public offering is up to five times oversubscribed, meaning demand for the stock far exceeds supply.

Still, experts say to resist any initial price pop. “If you must invest in Reddit stock, wait until after the company reports its first quarter results,” Peter Cohan, the founder of a venture capital firm, wrote in Forbes.

Barchart writer Mohit Oberoi agreed, saying that “market forces should ensure that the stock settles near its fair value — which I believe is lower than… the company is seeking in its IPO.”

Oberoi’s opinion would mean that Reddit’s value has fallen more than 35% from an estimated $10 billion in 2021.

Reddit’s success depends on its volatile Redditors

Reddit is heavily dependent on ad revenue, and advertisers are sensitive to its content. And of course, its content is determined by volunteer Redditors who have traditionally been under-regulated.

“Currently, Reddit has a lot of adult videos that are being broadcasted, but once they become a public company, that could open up risk for advertisers to potentially shy away,” Financial Times reporter Anna Mutoh said on a podcast earlier this month.

Not to mention, Redditors aren’t hesitant to go dark if they have a problem with the site. That happened in 2015 when moderators shut down major subreddits to protest the firing of Reddit’s director of talent, Victoria Taylor. It happened again in 2023 to protest the site’s new API fees. While the 2023 shutdowns did little to change the company’s policy, they garnered widespread attention.

Redditors’ influence goes beyond the company, too. The subreddit WallStreetBets is solely responsible for the major short squeeze of 2021. Seeking to punish wealthy institutional investors for short-selling (or betting against) smaller, struggling companies, Redditors started a buying frenzy for GameStop stock in 2021. Their efforts sent the stock surging to more than 20 times its value at the start of the year. The frenzy popularized the idea of meme stocks, and was dramatized in the 2023 movie “Dumb Money.”

So it’s not surprising that investors are scared Reddit could get memed by its own users. The company is reserving 8% of its IPO shares for certain Redditors with no lock-up period, which Alpha Cubed Investments CEO Todd Walsh told InvestorPlace has “possible short-term risks associated with it.” There has been talk on WallStreetBets about short-selling Reddit stock on its first day of trading Thursday.

Reddit itself cited Redditors as a risk factor in its SEC filing, going further than Walsh to say WallStreetBets retail traders could create “extreme volatility” of share prices.

Reddit’s bet on AI isn’t necessarily a compelling argument for its success

Reddit last month announced a partnership with Google to let the search engine train its AI models with the site’s user-generated content. While licensing its data for AI training purposes is a new form of revenue generation for Reddit, The Financial Times’ Mutoh also notes that the actual site could lose its luster if its information becomes readily available through AI.