Reddit files to go public at last | Equity Podcast

Key Takeaways

this episode is sponsored by Morgan Stanley atw work visit morganstanley.com assessment to get your free transaction Readiness assessment [Music] today hello and welcome back to equity this is an equity shot bringing you breaking news that wasn't out in time for our Friday show and we would have had Maryanne on this episode but she is currently sick we love her but I did get to write with her about the Reddit IPO which we have Linked In the show notes and I think it's probably still on top of tech wrench.com so go check that out but yes Reddit is going public at long last and you know we couldn't wait all the way till Monday to talk about the numbers talk about what we've learned we've been waiting for this guys for so long finally here and I'm so excited about it if you are a regular Equity listener you might recall that we did discuss reddits deal with Google on the Friday show and back on February 9th we talked about the ad market so we have been digging in on this for some time but now we got the S1 filing which means we have so much information that's new interesting and important so here is an overview for you this lovely weekend we'll have more of course as this company tells us more and we learn more about other IPOs but for now here's what you need to know online Forum giant Reddit is going public it's looking at the New York Stock Exchange it's targeting the ticker symbol rddt not super catchy but pretty much on the nose so we can put that aside now the company has filed its first S1 filing that means we do not have any information yet as to what price range the company May Target when it does list its shares publicly so we do know that back in the day Reddit was valued at about $10 billion but that was a 2021 error price that I don't think many people think the company will reach in its IPO we've heard prices more around the $5 billion Mark and I've done some math that kind of makes that make sense but we'll have to see what the market itself says when we get s1a felings after the company does its Road Show so valuations to come today we're going to talk about its operating results and what that tells us key details that you need to know Reddit grew 21% in 2023 expanding its total revenue from about 667 million in 2022 to $84 million last year that's a lot just full stop Red's getting close to the billion doll Revenue Mark which I think is kind of Testament to being a real unicorn versus more of the startup e unicorn billion doll valuation also the company's revenue is great it has insanely good gross margins which came to I think 86% in 2023 up about 200 basis points from 2022 and what this means in effect is as Reddit brings in more Revenue it gets to use nearly all of that money against its operating expenses it's just fantastic and in a non-financial sense Reddit is also doing pretty well on its user count growth the company has a metric called wow AKA W auq weekly active users effectively and that number scaled from 218 million in the second quarter of last year up to 2675 million in the fourth quarter of 2023 and that's the highest number we have data for so Reddit is coming into its IPO cycle with pretty strong user momentum that's great because lower users more activity more activity more Revenue people want to see a growth Story and there's one but despite the strong growth despite the strong margins and despite the fact that reddit's usage is going up the company is still losing money and burning cash the company had a net loss of about $91 Million last year and negative free cash flow in 2023 of about 85 milli million those are not terrible numbers for a tech company going public in terms of percentage of Revenue terms I mean I mean no one wants to lose $91 million but the company is still unprofitable and it's unprofitable at a point in time in which investors on the public markets are putting more value on cash generation and also just general profitability now in response to that I will say that in the fourth quarter of last year Reddit did post positive net income that's very important and it reached about $250 million in revenue of course any ad-based company is going to have a better Q4 than any other quarter because people advertise more around the holiday season but still a quarter billion dollar quarter and positive net income are big things that Reddit has in its back pocket as it goes out to investors on its Road Show and says hey you should invest in us there's also other tailwins to note Reddit did sign that deal with Google we mentioned on the other show but we got more information from the company on the details of its data deals and the numbers look pretty enticing so this year alone Reddit expects to recognize at least $ 66.4 million in data deals with AI companies and models that's about what 78% of its Revenue last year so that's some growth that's baked into its business even if its core operations are flat this year which I don't think they will be but it does mean it has growth already kind of locked in even more the total value of the AI deals it has signed for its data are worth 203 million over the next couple of years and the company thinks those numbers are going to go up so if you believe in the AI growth story Reddit could be a pretty attractive buy is your company planning to go public or conduct a shareholder liquidity program within the next 18 to 24 months did you know that proactively planning for your next private company liquidity event or IPO can help you maintain greater control over timelines and outcomes Morgan Stanley at work believes that when you have the right technology and systems in place working in harmony leading up to a transaction you can prepare and execute with more accuracy and ease visit morganstanley.com assessment to connect with their issuer strategy and Excellence team for a free assessment to find out if your company is transaction ready again that's morganstanley.com assessment to get your free assessment today on the other hand the company did consume cash in the fourth quarter of last year and that's not great it was profitable sure but still burning cash at this level of maturity age and scale isn't the world's best thing to tell investors that said I do think the company has more positives than negatives to kind of take on its Road show but I just bring that up to point out that no company is perfect when it goes public and reddit's unprofitability will probably be the chief sticking point in its operations it also has to tell investors that its Core Business which is essentially ads against its social AC activ it on its website do have legs to grow the ad Market as we've talked about on this show had a somewhat rough 2023 but did get better as the year ended and you can see that in the results of meta Amazon and other companies that do quite a lot of AD based business but Reddit is a smaller site and we have seen companies that are not amongst the absolute top tier of the tech World suffer a little bit in advertising growth think about snap and maybe X for example in that bucket still with 21% growth last year reddit's doing at least fine I'm just curious to see how much it Core Business can expand this year and I presume investors will also want to know okay so that's redit in a nutshell of course there's a lot more in the S1 filing as always I really recommend that you at least skim it this is the sort of thing I think teaches us a lot about how businesses work how they see the world who owns their shares and more but let's talk about context a little bit Reddit is going public it's a big deal for its backers its shareholders its employees its fans and possibly even some Reddit users who may get IPO allocation but the Reddit IPO matters for a lot of other companies as well there are so many unicorns and late stage startups that need to go public or find an exit through another Avenue and if Reddit prices well and trades well it could better open that door and allow more companies to go public quickly and also more aggressively on the other hand if Reddit struggles out the gate and doesn't do well it doesn't price well has a bad first days trading it could really throw the proverbial wet blanket over the IPO market and leave a lot of companies stuck between needing to go public and being too afraid to so Reddit won't be the chief and most important bellweather of all time for the IPO Market but it is a big well-known tech company that is going to go public and so it will matter regardless if it was an Enterprise SAS company it probably have more weight in the decisions of other unicorns but Reddit is still just so welln and so venture-backed that yeah this one one really does matter we will be covering this IPO in detail over the coming weeks we expect an s1a filing in a couple of weeks after the road show gets through its motions and so stick with Equity as we figure out what's happening here and also what will happen next Equity comes out three times a week Mondays Wednesdays and Fridays and sometimes even on the weekends when things happen that we just can't not talk about my name is Alex the whole crew is back next week I'll talk to you on Monday bye Equity is hosted by myself Alex Wilhelm and Tech rench senior reporter Mary an aeto we are produced by Teresa loans solo with editing by Kell Bryce Durban is our illustrator and a big thank you to the audience development team and Henry pette who manages techren audio products thank you so much for listening and we'll talk to you next time