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Reddit's IPO Is Coming. Should You Buy?

The popular discussion board is going public in 2022. Does Reddit's IPO represent a long-term investment opportunity? Or should you downvote it?

Online discussion platform Reddit confidentially filed for its initial public offering (IPO) in December 2021. The platform, whose value has skyrocketed from $3 billion in 2020 to nearly $10 billion in August 2021, intends to debut on the stock market with a valuation as high as $15 billion.

Let's take a look at whether investing in Reddit's IPO is a good idea or not.

Figure 1: Reddit logo icons. Photograph: Dado Ruvić/Reuters

Figure 1: Reddit logo icons. Photograph: Dado Ruvić/Reuters

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Reddit's Valuation Overview

Last September, Wall Street Memes published an article featuring three valuation charts for a possible Reddit IPO. At that time, Reddit had 52 million daily active users (DAU) and more than 430 million monthly active users.

Since its founding in 2005, Reddit has raised a total of $1.3 billion, with over 70% of that raised in the last two-and-a-half years. Reddit was valued at $9.6 billion in August 2021, more than triple its 2019 valuation of $2.7 billion.

Now, using a $15 billion IPO valuation and considering the most current ad revenue figure of $100 million in Q2 2021 and the current annual run rate of $400 million, its price-to-sales (P/S) ratio would be 37.5. That's higher than major competitors like Snap  (SNAP) - Get Snap, Inc. Class A Report with a P/S of 16.9, Meta  (FB) - Get Meta Platforms Inc. Class A Report with a P/S of 7.8, and Twitter  (TWTR) - Get Twitter, Inc. Report with a P/S of 6.2.

In a growth-adjusted P/S comparison, Reddit revenues grew 200% year-over-year in 2021, assuming 75% growth over the next five years. This growth rate compares to Meta's 26%, Twitter's 30%, and Snap's 59%. (All estimates, except for Reddit's, have been provided by Seeking Alpha.)

Figure 2: 5 year forward growth-adjusted P/S.

Figure 2: 5 year forward growth-adjusted P/S.

Still, Reddit's numbers are more stretched than Facebook's or Twitter's:

Will It Become a Meme Stock?

The Reddit platform helped bring the meme stock movement to life last year. However, despite being a favorite place to discuss "stonks" and "tendies," Reddit won't necessarily become a meme target.

Recently, in a very upvoted post on one of Reddit's main discussion forums, a user asked whether other Redditors will buy the stock once it completes its IPO. Several Redditors raised concerns about how the IPO will impact the platform's model.

Specifically, they're worried that there will be more pressure for increased revenue. That could lead to an uptick of advertisements that could harm the platform's navigability. The Redditors are also concerned that the IPO will lead to a potential tightening of the platform's restrictions on NSFW (not safe for work) content.

Mad Money host Jim Cramer, whom the Reddit crowd view as some sort of "nemesis," has also recently commented on the social media platform's IPO:

The Bottom Line

Considering Reddit's most current revenue and valuation numbers, the stock will possibly have a fairly high valuation, compared with its peers.

It's still too early to say whether or not investing in Reddit's IPO is a good choice, given the limited information available so far and based on an extremely dynamic market — especially when it comes to IPOs.

(Read more from Wall Street Memes: GameStop Stock: NFT Could Revive Meme Mania in 2022)

(Disclaimers: this is not investment advice. The author may be long one or more stocks mentioned in this report. Also, the article may contain affiliate links. These partnerships do not influence editorial content. Thanks for supporting the Wall Street Memes)