How to Invest in Reddit Stock | The Motley Fool (2024)

If you're looking to invest in Reddit stock, you may be disappointed to discover it's not as easy as you might think.

Reddit is not a publicly traded company, meaning that you can't easily buy the stock the way you can with its social media peers like Meta Platforms (META -0.33%) and Snap (SNAP -1.97%).

However, Reddit is a unique property in the social media sector, and rumors have long swirled about a possible initial public offering (IPO). The company even filed pre-IPO paperwork with the Securities and Exchange Commission (SEC) in 2021, but with tech stocks crashing in 2022, it chose not to move forward at that time.

With tech IPOs starting to pick up steam, including recent filings from Arm and Instacart as the IPO window opens again, investors could have a shot at a Reddit IPO in the not-too-distant future. In fact, Bloomberg reported in December that the company is holding talks with investors and could go public as early as the first quarter of 2024. For now, since Reddit is currently a privately held company, investors will either have to be patient and wait for an IPO or invest in the stock through secondary channels.

In this deep dive into how to invest in Reddit stock, we'll discuss its status as a privately held company, when it could launch an IPO, how you can invest in it now, whether Reddit is profitable, if you should invest in the company, and if exchange-traded funds (ETFs) have exposure to Reddit.

Is Reddit publicly traded?

Is Reddit publicly traded?

Reddit is not currently publicly traded, but there are signs the social media company, which was founded in 2005 and best known for its tens of thousands of message boards, is preparing for an initial public offering.

The company had confidentially filed to go public in December 2021, seeking a valuation of $15 billion. But valuations in the tech sector and social media have fallen since the peak of the pandemic boom, so it's unclear what valuation Reddit would seek if it went public today.

In its last funding round in August 2021, Reddit raised $410 million at a valuation of more than $10 billion. Since then, however, the value of the company seems to have come down. In June 2023, Fidelity wrote down the valuation of its holdings in Reddit, indicating that it now believes the social media platform is worth only $5.5 billion. But if the company chooses to go public, those private valuations won't matter since the market will judge it based on its performance and future prospects.

With the Nasdaq rebounding strongly heading into 2024, this could be a good time for Reddit to make its debut, but it's still unclear if the company will launch an IPO soon.

Will Reddit IPO?

Will Reddit IPO?

Reddit could have its IPO sometime in 2024.

Since The Information reported in February that the company plans to go public, there haven't been updated filings with the Securities and Exchange Commission.

CEO Steve Huffman told The New York Times in August that the company "is still planning on going public, but we don't have a firm timeline there yet. All good companies should go public when they can."

Since The Information's report, Fidelity reduced its estimate of the company's worth in June. Reddit was also reportedly struggling with protests over changes to its API pricing, with some popular subreddits going dark in response to the move.

It's unclear how much of an effect the upheaval has had on the company's business. Companies typically like to go public from a position of strength. But given Huffman's comments and the earlier reports about plans to go public in the second half of 2023, it seems that an IPO is more likely to come sooner rather than later.

How to invest

How to invest in Reddit stock

Since Reddit isn't publicly traded, investors can't buy the stock through a brokerage as they would with a typical stock. But there are options for getting exposure to Reddit ahead of the IPO if you're looking to do so.

One way to get exposure to privately held companies is by investing in publicly traded companies that own stakes in them. Amazon (AMZN -1.43%), for instance, took a significant stake in Rivian (RIVN -2.52%) while the electric vehicle manufacturer was privately held, giving Amazon a windfall when it went public (although Rivian's valuation has since fallen sharply).

In Reddit's case, Tencent (700 1.62%), the Chinese tech giant, holds shares of the social media company, so investors could get exposure to Reddit by investing in Tencent. Tencent invested $150 million in Reddit in 2019 for a 5% stake in the company, although that investment has been diluted since Reddit has raised more money. Tencent, however, is a huge company with a market cap of $400 billion, so it's probably not worth buying the stock just to indirectly own Reddit.

You can also buy shares of Reddit through platforms like Equitybee or Forge Global, which allow individuals to fund employee stock options, essentially giving them the ability to invest in privately held companies.

However, this process isn't as direct as buying shares in a publicly traded company, and you have to be an accredited investor to buy private shares this way. That requires having a net worth of $1 million or earned income of at least $200,000 for each of the last two years.

Profitability

Profitability

Social media has been a fabulously profitable business model for companies like Meta since it allows them to sell ads against user-generated content, which can be very lucrative with enough traffic and the right targeting.

Although Reddit makes most of its money from advertising and an ad-free premium membership plan, it has struggled to tap into that business model so far and is still unprofitable despite operating for nearly 20 years.

As a privately held company, Reddit doesn't report financial results, so getting exact figures is difficult. But Huffman said in June that the company had never been profitable when he defended the company's decision to start charging third-party apps for its API.

According to most sources, revenue at Reddit was between $350 million and $485 million in 2021, and The Information reported that revenue increased 38% to $670 million in 2022.

It's not clear how unprofitable the company is, but the rapid revenue growth is encouraging, even as Huffman seems to be struggling to get the bottom line into the black and is frustrated with the response from third-party apps.

Should I invest?

Should I invest in Reddit?

Without knowing its complete financial results, it's difficult to say whether it's a good idea to invest in Reddit stock, especially since the company doesn't have a clear valuation.

We do know that Reddit is unprofitable, and management is struggling to achieve profitability. It also may have damaged its relationship with a key constituency with the move to begin charging for third-party API access.

However, Reddit is a unique property on the internet and social media, and its recent growth is encouraging, especially during a broader slowdown in digital advertising.

Assuming Reddit does go public, the stock is likely to be volatile and risky. At the right price, investing in the stock makes sense, but investors should wait to see a path to profitability since that seems to be harder to achieve than the company expected.

ETF options

ETFs with exposure to Reddit

Exchange-traded funds aren't typically a good way to get exposure to privately held companies since they mostly invest in publicly traded securities like stocks and bonds.

Although there are some ETFs that invest in private equity or venture capital firms and could give you exposure to Reddit, that exposure is likely to be minimal and not worth the investment.

Similarly, you can invest in an ETF that owns shares of Tencent, such as most Chinese ETFs, but you'd also only be getting a minimal stake in Reddit. The performance of the investment would not reflect the performance of Reddit.

It's rare that an ETF will give you significant exposure to a privately held company.

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The bottom line on Reddit stock

We'll learn more if the company files to go public and releases an S-1 prospectus. Until then, it seems like the company is still trying to find its footing and reach breakeven in the competitive social media sector.

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