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Redditors react to a possible IPO: 'It will be the end of Reddit'

·Markets Reporter
·4 min read

Reddit, the social media platform synonymous with retail traders involved in the GameStop (GME) frenzy, could reportedly go public early next year. The company is looking to hire investment bankers and lawyers to prepare for an IPO in New York, according to a Reuters report.

Some users on the Reddit forum WallStreetBets are concerned with how going public will impact the 16-year-old platform. WallStreetBets exploded in popularity during the GameStop frenzy and now has more han 10 million members.

"It will be the end of Reddit," wrote latestagecapitalist. "Reddit only has one resource to harvest — the users — almost anything they do to get more revenue will piss the user base off more — every year they need to increase revenue now."

Reddit became a household name when GameStop shares surged on a so-called short squeeze in January. WallStreetBets users piled on the stock as hedge funds were forced to cover their short positions on the video game retailer, sending share prices higher.

The company is reportedly seeking a $15 billion valuation. That's about 50% higher than its most recent private equity funding valuation of $10 billion.

Concerns over advertising

Much of Reddit's revenue is derived from advertising, though it also offers a premium subscription ad-free with access to exclusive features. The company reported about $100 million in revenues in the second quarter, almost three times higher than the same period last year.

Many of the comments on WallStreetBets about a possible IPO voiced concerns of more advertising on the platform.

Steve Huffman, CEO and Co-Founder of Reddit, testifies about stock trading and GameStop, during an entirely virtual hearing of the U.S. House of Representatives Committee on Financial Services entitled ?Game Stopped? Who Wins and Loses When Short Sellers, Social Media, and Retail Investors Collide??, in Washington, U.S., February 18, 2021.   House Committee on Financial Services/Handout via Reuters
Steve Huffman, CEO and Co-Founder of Reddit, testifies about stock trading and GameStop, in Washington, U.S., February 18, 2021. House Committee on Financial Services/Handout via Reuters

"I’ve abandoned all the other social media platforms to avoid all the ads. If they try to monetize Reddit with ads anymore than they already have, it’ll cost them my engagement and I imagine I’m not alone," wrote CMD-ZZZ.

"Reddit is trying everything it can to cater to users to keep them glued here 24/7, which some institutional investor is gonna buy to start shoving ads and trackers into users faces every chance they get," wrote LaLiLuLeLo_0.

"As a redditor I see this as a good thing," wrote Karl_Marx. "That said, I'm not buying this stock, I'm convinced it will plummet on release."

Reddit allows users to post without revealing their real identities, a feature the company's co-founder and CEO Steve Huffman defended earlier this year during a GameStop-related Congressional hearing.

"Something like WallStreetBets would not exist if users had to reveal their full identity because ... people are revealing gains and losses," Huffman told lawmakers in February.

As for misinformation, Huffman said, "Our user base is exceptionally good at sniffing out untruths, misinformation, fake stories, both within this community and Reddit at large."

“In order for any piece of content to be successful on Reddit, it has to be accepted by that community and receive the same amount of votes that anything else would," added Huffman.

'A lot more scrutiny on content they produce'

The timing of the IPO will be important, according to one market strategist.

"If we get a correction between now and when they go public, the price of the IPO could be significantly lower," Miller Tabak's managing director equity analyst Matt Maley told Yahoo Finance.

"Especially when the market is so important for the economy — people will start looking for scapegoats. And Reddit would get a big target on its back," he continued.

Maley says regulators may become concerned over the possibility of bots or hedge funds scouring the platform, hiding behind obscure user accounts that drive certain stocks higher. Reddit uses moderators to enforce rules and remove questionable posts or spams.

"I’m not saying anything against Reddit," Maley said. "But if regulators decided Reddit has to become more transparent because they’re worried about the 'pump and dump schemes,' revealing who they are (users), that will take people off Reddit."

One reddit user on Twitter agrees.

"Yes if they go public there will be a lot more scrutiny on content they produce," @redditinvestors told Yahoo Finance.

Reddit declined to comment on Reuters' report on its plans to go public.

Ines is a markets reporter covering stocks from the floor of the New York Stock Exchange. Follow her on Twitter at @ines_ferre