Jim Cramer recently voiced concerns about the potential impact of Reddit’s upcoming IPO on the current bull market. Despite Reddit’s long history, it has never turned a profit and relies solely on adjusted EBITDA for financial performance, a measure that Cramer does not recognize due to consistent losses.
However, Reddit’s $804 million revenue in 2023 has attracted the interest of institutional investors. The IPO, expected to be valued at $7 billion, includes employee stock sales, potentially appealing to buyers from the GameStop era and Robinhood’s options trading community.
Cramer highlighted the significance of Reddit’s IPO outcome on market dynamics, noting that its success or failure could impact supply and demand dynamics. He compared Reddit to companies like Arm Holdings and Instacart, emphasizing the unique challenges Reddit faces due to its unconventional business model.
Expressing skepticism about Reddit’s transition from a message board to a successful business, Cramer cited the platform’s large and sometimes unruly readership of over 70 million people.
Cramer suggested that for the bull market to continue, Reddit’s IPO should produce a modest pop rather than a significant one. If Reddit’s stock rallies, it may influence other companies to follow suit. Conversely, if it fails to perform well, it could contribute to a continuation of limited share supply, influenced by ongoing buybacks, which tend to drive down natural supply.
In conclusion, Cramer suggested that those wishing for the bull market to persist should root against Reddit’s IPO and bet on its failure to maintain its opening price.
Reddit’s IPO has garnered significant attention due to its unique approach, such as reserving IPO shares for its most active users, aiming to bolster user loyalty. However, this strategy also presents risks associated with user behavior and engagement.
The company’s decision to target a $7 billion valuation, down from its previous $10 billion valuation, reflects broader investor skepticism towards unprofitable companies. Despite this, Reddit’s IPO is considered a significant event for the tech industry, marking the year’s first major tech IPO.
Reddit’s revenue growth, particularly a 20% increase in annual revenue for 2023 driven by its online advertising business, has been viewed positively. However, concerns arise as 98% of its revenue is derived from advertising, raising questions about the platform’s dependence on this revenue stream.
Examining penetration rates based on Daily Active Uniques (DAUq) and Weekly Active Uniques (WAUq) reveals potential challenges in assessing Reddit’s growth potential, both domestically and internationally. Understanding these metrics is crucial for evaluating the platform’s future trajectory and expansion opportunities.