Are you looking to buy an IPO? With Sofi Active Invest you can participate in upcoming IPOs before they trade on an exchange.
While 2021 will go down as the year of pandemic-related angst, for Wall Street hedge fund managers, their health crisis arrived in the form of supremely elevated blood pressure thanks to the meme-stock phenomenon. Through informally coordinated activity across social media boards, bold speculators deliberately bid up shares of publicly traded securities featuring stratospheric short interest.
Traditionally, investors put their funds to work in public companies hoping that their valuations rise, a fundamentally intuitive proposition. Short trading, on the other hand, involves the borrowing and subsequent selling of securities, under the expectation that they will fall in value. Should that occur, short traders buy back those securities to return to the lender (brokerage), pocketing the difference.
However, such a mechanism is one of the riskiest in finance since rising prices mean the bearish trader will pocket losses. And since no upside limit exists in theory, participants could incur unlimited liabilities. But those who took the opposite trade benefitted handsomely, intensified by the sweet satisfaction of the proletariat taking down the aristocracy.
Of course, the platform that undergirded this paradigm-shifting phenomenon was Reddit, Inc. Once sated with the downwind revenue stream of quiet notoriety, the social media firm’s days of enlistment in the silent service is coming to an end. Instead, it's pumping air into the ballast with a hotly anticipated initial public offering (IPO).
When Is the Reddit IPO Date?
Although the Reddit IPO is breaking news at the time of this writing, the social media firm had already signaled its intention to go public a few months back, albeit perhaps unwittingly. According to a Reuters article in early September, it reported that the company sought to hire investment bankers and lawyers to support a market debut, citing two people familiar with the matter.
On Wednesday, management made it official, announcing that it filed a “draft registration statement on Form S-1 with the U.S. Securities and Exchange Commission” (SEC), per a report from Benzinga’s Shivdeep Dhaliwal. Unfortunately, as of this moment, that’s about all investors will officially hear about the Reddit offering. The company stated that it has essentially flicked off its sonar for “regulatory reasons” and that it cannot “say anything further.”
Usually, IPO coverages will feature the basics, even for pre-merger special purpose acquisition companies (SPACs) which inherently offer limited information. But in this case, it will be nothing but empty water until Reddit surfaces again with additional data points. Therefore, those hoping for a date on the IPO calendar must exercise patience.
Indeed, prospective participants at this time don’t even know which exchange shares will list under nor what the ticker symbol will be. As for the size of the deal and the amount of shares offered and at what price, these details are also hidden at the present juncture.
About the only other solid detail interested parties have is that Reddit will enter the public arena via a traditional IPO, not through a reverse merger with a SPAC. Given that SPAC-based business combinations have conspicuously underperformed benchmark indices, as well as presenting equity dilution risks, this small but important disclosure may comfort some would-be buyers.
Nevertheless, Reddit is making waves at a simultaneously intriguing and perplexing time. According to a CNN Business article, during the first three quarters of this year, “785 companies have gone public in the United States, compared to 664 for all of 1996 — the dawn of the internet stock mania — and 555 in 2020.”
By the numbers, Reuters mentioned that with only weeks remaining in 2021, domestic IPOs have totaled $301.26 billion, screaming past last year’s record of $168 billion. On one hand, the enthusiasm for new listings — which are inherently risky — is encouraging. But on the other, the Federal Reserve’s determination to raise interest rates next year may stymie risk-on assets.
Reddit Financial History
Obviously, without access to the social media firm’s Form S-1, which details the investment proposition and core financial details of a soon-to-be-public enterprise, it’s virtually impossible to determine its financial performance as it relates to the valuation of Reddit stock.
Primarily, interested buyers shouldn’t just pay attention to the headline figures for this IPO. Instead, they must also understand what percentage of the company’s total equity will be available for public purchase. Not assessing this metric could potentially lead you to pay far too steep a price for too small a stake.
However, prospective investors won’t be navigating completely uncharted waters. From an article by The New York Times, Reddit raised $410 million in a private-equity funding round in August of this year. Thanks to the financing deal — which Fidelity Investments led — Reddit’s valuation at the time jumped to more than $10 billion.
Six months prior in February, the company raised $250 million, sending the valuation to $6 billion, demonstrating how much attention the platform has generated from Wall Street. Interestingly, Times mentioned that the August funding round wasn’t expected. However, per Reddit co-founder and CEO Steve Huffman, “Fidelity made us an offer that we couldn’t refuse.”
Although the social media outlet occupies an enviable perch, an old adage may apply: to whom much is given, much will be required. When Reddit was a private enterprise, for instance, it could address its various controversies — particularly distribution of toxic or inflammatory content — with greater leeway than it would presumably have as a public company.
Moving forward, major shareholders will likely expect Reddit to maintain a decorum compatible with contemporary mores. Naturally, such content arbitration and moderation will consume resources, potentially pressuring the bottom line.
Additionally, key backers will want management to focus on accretive initiatives. Per a different Times article, “Reddit acquired Dubsmash, a TikTok-like video platform, and Mr. Huffman has said he hopes to improve the company’s video products as a potentially lucrative revenue stream. Reddit also sells advertising to brands and marketers, and allows users to buy digital goods and services across the site.”
Though compelling, interested buyers must still analyze the S-1 when it’s publicly available. Critically, they should assess revenue mix, especially in the advertising component. If, for example, excessive revenue streams stemmed from the meme-stock phenomenon, this catalyst may not be indefinitely sustainable.
With so much interest zeroed in on the Reddit IPO, it could easily be one of the hottest public market debuts of 2022, the year it’s likely to launch. Further, the social media giant fundamentally enjoys the wind at its back. Not only is demand for IPOs sky high, speculative activity in general has reached a blistering pitch.
Though the excitement is palpable, investors must realize first and foremost that IPOs involve multiple variables. As other high-profile debuts from the trailing year demonstrated, even the most well-financed deals can crumble under the weight of intense public scrutiny.
While prospective buyers will have much time to perform due diligence, one of the underappreciated risks is the potential cultural shifts that can occur once Reddit transitions. As its loyal users know, the beauty of Reddit’s almost-anachronistic interface is that the focus is on building community through content rather than on characteristics.
Therefore, like a surfaced submarine unable to leverage its greatest asset — the element of surprise — Reddit may fall under public pressure to change its culture. While such a scenario could be profitable, it also presents great risks.
How to Buy Reddit IPO Stock
If you intend to acquire Reddit on the open market, you’ll need to know how to buy stocks. See below for a refresher.
Step 1: Pick a brokerage.
Everything starts with picking the right brokerage. Since the best brokers compete on similar financial incentives, choose one that ideally suits your needs.
Step 2: Decide how many shares you want.
In many ways, IPOs represent shots in the dark. To help mitigate downside movements, engage these opportunities with a balanced share count.
Step 3: Choose your order type.
Before trading, learn these market concepts.
- Bid: The buyer’s best offer for a stock.
- Ask: The seller’s lowest acceptable price.
- Spread: The difference between the bid-ask price, the spread indicates market risk as this is also the profit margin for market makers.
- Limit order: Buy or sell requests at a predetermined price, limit orders provide transparency but no execution guarantees.
- Market order: Market orders guarantee fulfillment but only at the current rate.
- Stop-loss order: Stop-loss orders automatically exit your position at either a predetermined price or anything lower.
- Stop-limit order: Stop-limit orders only leave positions at a specified price, but they also carry non-fulfillment risks.
Step 4: Execute your trade.
Follow these steps to execute a market order:
- Select your action type (buy or sell).
- Enter the shares you want to acquire (or sell).
- Hit the Buy (or Sell) button.
Follow the same sequence for limit orders (but include your execution price).
Reddit Restrictions for Retail Investors
Review the Financial Industry Regulatory Authority (FINRA) rules on restricted persons before participating in an IPO. Don’t engage if you have privileged information.
Those interested in pre-IPO access (or shares at their initial offering price) for Reddit should sign up to receive the latest information from Freedom Finance.
Seawolf or Sitting Duck?
Undeniably, Reddit will attract the full spectrum of investors for its upcoming IPO. Just the namesake platform is too influential to ignore. Nevertheless, interested buyers must conduct extensive due diligence as multiple risks pose dangers to its seaworthiness.