Reddit Inc., the social media network that helped fuel the meme-stock trading mania in the early months of 2021, is about to become a publicly-traded company.

The San Francisco-based company made its first step toward becoming public in December as it filed (confidentially) to sell shares on the stock market.

Reddit, which got its start after its current CEO Steve Huffman and Alexis Ohanian at the University of Virginia 17 years ago, is expected to be one of the biggest initial public offerings of 2022.

But what is the company’s business model? How does it even make money?

Here is a couple of things you need to know as the company preps for its Wall Street debut.

About Reddit

Reddit was founded in 2005 and is one of the world’s most visited social media platforms.

The company was acquired by Conde Nast Publications in 2006 and was part of the mass media firm until it became an independent subsidiary 11 years ago. It went through a pair of CEOs before Huffman made a return to the helm in 2015.

Reddit started as a simple, bulletin board-based platform where users could create individual spaces called “subreddits” to share posts about their interests and hobbies.

Each post is open to every user on the site to vote upon, either by up or downvotes. Subreddits are arranged by categories and Reddit users can follow their favorite subreddit and control what content they view on their custom front page.

According to the two Reddit co-founders, the original idea was to create a “front page for the internet.”

Today, the site hosts boards on a wide array of topics and is home to more than 100,000 active groups. It also has plans to move deeper into video and audio, which tend to command premium ad rates.

In February, Reddit revealed that it now has more than 50 million daily active users. While the figure is small compared to other social media companies like Facebook parent Meta (NASDAQ: FB), Twitter (NYSE: TWTR), and Snapchat parent Snap (NYSE: SNAP), none of these rivals are seeing daily usage growth as quickly as Reddit.

According to a recent survey conducted by Pew Research Center, 18% of people in the U.S. say they use Reddit, an increase from 11% in 2019. The survey further revealed that over 25% of Americans earning more than $75,000 use the site.

Reddit IPO plans

As earlier mentioned, Reddit submitted confidential paperwork with the U.S. Securities and Exchange Commission (SEC) in December.

The company said in a press release that the date, amount of shares to be offered, and the proposed price range for the listing have not been set. It added that it expects the offering to happen after the SEC finalizes its review process, subject to market and other conditions.

Reddit had a private fundraising round in August, which earned it a valuation of $10 billion after raising $700 million.

A month later, Reuters reported that Reddit is targeting a valuation of more than $15 billion by the time it lists its shares. Reddit counts Fidelity Investments, Andreessen Horowitz, Tencent Holdings, and Sequoia Capital as its biggest investors.

Early last year, the company named Drew Vollero, who previously worked at Snap, as its first chief financial officer. Vollero guided Snap’s transition to a public company. He also served at toymaker Mattel (NASDAQ: MAT).

Reuters recently reported, citing a source familiar with the matter, that Reddit has tapped banking giants Goldman Sachs Group (NYSE: GS) and Morgan Stanley (NYSE: MS) for the IPO.

How big and profitable is Reddit?

Access to the Reddit app and website is free of charge and the company generates most of its revenue through advertisements on the platform.

The company also has a premium subscription service, which offers an ad-free experience. The service costs $49.99 annually and those using it receive 700 free coins and other perks each month.

Reddit had a private valuation of approximately $10 billion as of August 2021.

According to data compiled by Alexa Internet, Reddit is the 7th most-visited website in the U.S. and the 19th most-visited website in the world.

At the height of the Covid pandemic in 2020, the company generated revenue of $170 million.

In the second quarter of 2021, the company reported having generated revenue of $100 million for the first time in history.

Reddit said that this represented a 192% jump compared to the same period a year before, placing the advertising revenue realized in the second quarter of 2020 at roughly $34.25 million.

Redditors can gift the coins to other users for comments or posts for their good content and contributions. This also includes access to an exclusive subreddit group known as the r/lounge, which is for premium members only.

Will r/WallStreetBets have any effect on the IPO?

Like other internet businesses, Reddit greatly benefited from the pandemic lockdowns that forced more people to work from home and spend more time online.

In January 2021, the company made headlines after its r/WallStreetBets subreddit, became the cause of a massive surge in the so-called meme stocks like GameStop (NYSE: AMC), Blackberry (NYSE: BB), and AMC Entertainment (NYSE: AMC).

WallStreetBets, a community of online retail traders, initiated an unforgettable short squeeze that crippled some big hedge funds and caused Robinhood (NASDAQ: HOOD) to halt retail trading. The short-squeeze in GameStop and other meme-stocks created billions of dollars in losses for the hedge funds and other institutional investors.

Some users on the subreddit are concerned with how going public will impact Reddit, while others are contemplating making the company the latest meme.

Members of the subreddit reportedly don’t think Reddit is a great investment, mainly because they believe the quality of community on the platform will degrade if Reddit abides by the demands of Wall Street and advertisers.

The traders have been discussing how to profit off of the IPO, manipulate stock for the forum’s advantage, and even own a controlling stake in the company.

How to participate in Reddit IPO

While many stock traders are angling to buy Reddit shares as part of the listing, most will not get even a tiny piece of the social media company before it makes its debut. But you can always buy Reddit on the stock market, once the stock is available to the public.

But before buying any stock, you’ll need to analyze the company and its financial performance. The best point to start is with the prospectus the company files with the SEC, also called an S-1.

The S-1 can help detail how the company makes money, its assets and liabilities, its profitability and loss record, its competitors, its management team and their resumes, and the risks it faces.

You also want to evaluate how much money you can put in the stock because flotations – particularly flotations with uncertainty about their ability to sustain profits – can be very risky.

Lastly, there is the part of opening a brokerage account. A brokerage account will allow you to buy or sell stocks on the stock exchange, and you can open one easily and quickly, often in 10 minutes or less.

You’ll want to go for a broker that suits your needs. Brokerages often compete on price, with most of them vying for the lowest possible trading commission. Many brokers also provide extensive education and research tools, to help you make wise decisions.

Others offer commission-free ETFs and no-transaction-fee mutual funds for traders who are looking to do more than just trade individual stocks.

Best brokers for trading Reddit IPO

• LightSpeed -Best for Active Traders
• Webull -Best App
• TDAmeritrade – Best overall

 

After you have opened your account, you will need to fund it with the amount of money that you want to spend on Reddit shares. To buy the stock, you’ll need Reddit’s ticker symbol, which the company will reveal as the IPO gets closer.

Then you can proceed to set up a trade andinput the ticker symbol and the number of shares you would like to buy, depending on the amount of money you have allocated to the trade.

Your broker will then ask you whether you want to make a market or limit order. A market order instructs the broker to execute the trade at whatever the prevailing price is, while a limit order instructs the broker that you want to buy or sell the stock at a specific price or better.

Bottom Line

Wall Street traders are expected to flock the highly awaited offering, although there are a few concerns about Reddit’s long-term growth.

One of the concerns is whether Reddit will achieve anything beyond its niche status within the social media space, or whether raising a huge amount of money through the listing will allow it to invest in future growth to help it take on rival social media companies.

It is too early to tell whether the Reddit IPO will be a good one. But given the company’s most recent valuation numbers and revenue, the company is likely to have a fairly loft valuation than its peers.