WallStreetBets isn’t sold on Reddit’s IPO

WallStreetBets has become a force on Reddit and on Wall Street in 2021.
WallStreetBets has become a force on Reddit and on Wall Street in 2021.
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On Dec. 15, Reddit, the self-styled “front of page of the internet” announced it was becoming a publicly-traded company and filed a confidential S-1 with the US Securities and Exchange Commission.

Reddit has been talking about going public since March 2021 when it hired its first chief financial officer. The company raised $410 million from Fidelity Investments at a $10 billion valuation in August.

Like other internet companies, Reddit has benefited from pandemic-era behavioral changes: more time spent online, and more people working from home. Reddit has also benefited from the explosive popularity of meme stocks, popular stocks boosted online by groups of retail investors. WallStreetBets, a raucous community of investors in Reddit, has been the foremost promoter of meme stocks including GameStop, AMC, and Bed Bath & Beyond. In January 2021, WallStreetBets famously squeezed Wall Street hedge funds short-selling GameStop stock creating billions of dollars in losses for institutional investors.

WallStreetBets is now contemplating making Reddit its latest meme. The forum of 11.4 million market enthusiasts are discussing how to profit off of the stock, manipulate it for the group’s advantage, and even buy a controlling share of the company. WallStreetBets doesn’t think Reddit is a great investment, largely because they think a Reddit beholden to Wall Street demands and advertisers will degrade the quality of community on the platform. But that may not stop them from investing in it.

Time to go public

It’s a great time for Reddit to go public, said Greg Martin, co-founder of Rainmaker Securities, which lets retail and institutional clients invest in private, pre-IPO companies. Reddit has benefited from millions of people working from home during the pandemic, increased advertiser interest, and WallStreetBets’ popularity. The company disclosed that quarterly ad revenues exceeded $100 million for the first time in the second quarter of 2021.

“The rise of the meme stock dramatically grew the Reddit brand and its [user base] and revenues grew accordingly,” Martin said. The top two posts on Reddit in 2021 were from WallStreetBets.

But he doubts Reddit can live up to its targeted $15 billion valuation and sustain pandemic-era growth long term if traffic falls and advertisers flock to bigger platforms like Google and Facebook. Reddit claims more than 400 million users each month but most are “lurkers” without active accounts. There were about 43.3 million logged-in Reddit users in 2021, wrote Insider Intelligence analyst Nazmul Islam by email, and that number is expected to grow 6% in 2022.

In recent years, Reddit bought TikTok competitor Dubsmash for an undisclosed amount, started an in-house creative agency called KarmaLab, and bulked up its advertising offerings. But it still has work to do in order to fully capitalize on its user base. “From an advertising perspective, Reddit is still trying to ramp up its ad model but is not at a point of sophistication yet,” said Jessica Liu, senior analyst at the market research firm Forrester.

A skeptical subreddit

When Reddit announced its intention to go public, WallStreetBets users were already frustrated by Reddit’s years-long transformation from a free-wheeling web forum to a more buttoned-up tech company with advertisers to please. Reddit going public will lead to annoying and unskippable ads, edgier subreddit being removed, and eventually, porn being banned, one user griped.

Reddit has long resisted policies that might curb speech on the site, for years hosting racist, sexist, and violent subreddits. As Reddit built an advertising business, it gradually tightened its site rules and cleaned up the site. The company finally banned hate speech explicitly in 2020 amid the global Black Lives Matter protests.

Jaime Rogozinski, the founder of WallStreetBets, said subreddit members see Reddit as their online home and separate from the Wall Street establishment. “In that sense, it feels like their home is being corporatized and becoming part of the establishment,” he said. (Rogozinski is no longer part of the group.)

WallStreetBets users appear interested, however, in exerting control over Reddit. Some users spoke of creating a decentralized autonomous organization (DAO) to buy the company outright. Others suggested creating their own private equity firm to invest in Reddit. There was even talk of buying a majority of Reddit shares so they can claim some say over the company’s management.

None of these seem imminent. A majority ownership stake through mass buying might be possible, but is unlikely. AMC Entertainment, for example, is now 70% owned by retail traders, and shareholders even voted to stop the company from issuing new stock in July. But AMC, like GameStop, was a cheap stock for retailers to pour into with plenty of Wall Street institutions short selling it. Retail investors were able to co-opt the stock through mass buying and push the price skyward, forcing shorts to close out of their positions or risk escalating losses.

It’s unlikely that Reddit’s stock will share those dynamics. It’s more likely to be a highly valued, attractive stock for institutional investors who think it could replicate the success of similar social media stocks like Snap, Twitter, and Pinterest, each of which has posted sizable gains during the pandemic.

Rogozinski, for one, wasn’t bullish that WallStreetBets, the subreddit he created, could turn Reddit into a meme stock—at least not yet. “Coming directly off of an IPO, Reddit’s stock is likely going to be too valuable and too heavily traded to turn it into a meme stock in the near-term,” said Rogozinski. “It’s pretty much impossible to tell what will be a meme stock until it becomes one—but I doubt it will.”