Reddit (NASDAQ: RDDT) stock price will be in the spotlight on Thursday as the social media giant goes public. The latest figures show that the company will receive a valuation of over $6.4 billion, making it one of the biggest social media stocks.
Reddit is growing and narrowing its lossesThis IPO will lead to a strong windfall for companies like Advance Publications and Tencent. Sam Altman, the founder and CEO of OpenAI, the parent company of ChatGPT is expected to benefit as his stake is valued at over $377 million.
The question, therefore, is whether it makes sense to invest in Reddit after it goes public. As an investor, you will be buying a company with over 100k communities and more than 73k users from around the world. It also has 267 million average weekly unique users.
Investors will also be buying a company that is growing substantially. Its revenue in 2023 stood at over $804 million, up from $666 million a year earlier. It is also narrowing its losses as the net loss dropped from $158 million to $90 million.
Most of Reddit’s losses come from stock-based compensation and taxes followed by depreciation and amortisation.
There are pros and cons of investing in Reddit stock. A key benefit is that the company could gain popularity among retail traders, who have benefited substantially from its platform over the years. As such, there is a likelihood that these investors will pump the company.
The other benefit is that the company has narrowed its losses at a time when its revenue is showing some healthy growth. Further, the $6.4 billion valuation is a bit fair considering that this was a company valued at over $10 billion a while ago.
The first reason why Reddit stock price may underperform the market is that the company may struggle to grow its user base. For one, Reddit was started in 2005, meaning that it is a mature company now. Like Snap and Facebook, user growth may have peaked.
The company is also facing substantial competition, especially among the young generation. It is estimated that the average age of Reddit users stands at 23. Most TikTok users are below 18 years old.
Most stocks drop after the IPOThe other risk is that many newly minted public companies tend to do well initially and then pull back. For example, Arm Holdings stock initially jumped to $70 after going public and then retreated to $46.23 before resuming its bull run.
Similarly, Uber shares initially soared to $47 after going public in 2019 and then retreated to $13.7 in 2020. In 2023, CAVA shares jumped to $58 in July after listing and then crashed to $29.12 in October. It has then bounced back to $67.
Instacart shares rose to $42.94 in September to $22.14 in January of this year. The same usually happens in most companies that go public.
Therefore, there is a likelihood that the stock will jump shortly after going public as the momentum rises. It will then pull back and then rebound later this year.
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