Reddit loves users, so it’s giving itself a deal

Boston Beer

26/02/2024 15:07

(The author is a Reuters Breakingviews columnist.  The opinions
expressed are her own.)
    By Anita Ramaswamy
       NEW YORK, Feb 26 (Reuters Breakingviews) - The social
media site that spawned “Wall Street Bets,” the online watering
hole for the meme-stock craze, knows how to create hype. Reddit,
which filed to go public last week, plans to reserve a big chunk
of shares in its upcoming initial public offering for its
website’s users and moderators. Rewarding community members
through a so-called “affinity program” is risky, as similar
deals have shown. But it will likely help Reddit founder Steve
Huffman get what he wants.
    The people who muse and debate on Reddit’s platform are
paramount to its success. Their comments help attract paying
advertisers to the site. Plus, Huffman has started selling the
data they generate to artificial intelligence developers such as
Google-parent Alphabet  GOOGL.O  for training purposes,
according to Reuters. 
    But there are problems with Reddit’s business model, like
its dearth of consistent profit. Dollars designated to digital
ads are increasingly competitive, and Huffman’s efforts to open
other spigots have upset the site's volunteer moderators. And
unless Reddit can ink lucrative, multi-year deals to license its
content, its newer revenue stream could eat away at its core
business.
    All this in theory would make Reddit’s mooted $5 billion
valuation a stretch, but here’s where Reddit’s users could help.
Offering them shares might give them an incentive to speak
positively about the company’s prospects, not to mention indulge
a little longer in free work. Reddit understands the power of
this echo chamber, too. When Robinhood Markets  HOOD.O  offered
a similar deal to its customers in 2021, it sold shares in an
IPO that valued the trading firm at about $32 billion, almost
triple its worth in a funding round the year prior. That’s in
part thanks to the buzz that platforms like Reddit created, but
Robinhood’s users had a vested interest too: They were also
offered dibs on shares. 
    Other companies have done similar trades. Boston Beer
 SAM.N , the maker of Sam Adams, gave guzzlers the chance to buy
shares at a discount to the offering price in its 1995 IPO. Its
stock was down some 60% in its first year of trading. It didn’t
get back to its IPO price until 11 years on. 
    In the end, like with any IPO, the firm’s intrinsic value
will dictate where the stock settles long term. Investors who
held onto Robinhood shares are probably not feeling great:
Shares are worth two-thirds less than the IPO price. Huffman may
be dangling a benefit in front of his users. Really, though, the
gift is to him.
    Follow @AnitaRamaswamy on X
    
    CONTEXT NEWS
    Social media firm Reddit plans to reserve a chunk of its
initial public offering shares for some of its site’s users and
moderators through a directed share program, according to a
regulatory filing with the U.S. Securities and Exchange
Commission on Feb. 22. Separately, Reddit anticipates reserving
another chunk of discounted shares for retail investors, which
will be offered through brokerage platforms Fidelity, SoFi and
Robinhood Markets.
    Reddit has not publicly disclosed details about the number
of shares to be reserved for these groups. The Wall Street
Journal had reported on Feb. 21, citing unnamed sources, that
shares would be distributed to 75,000 of the website’s most
loyal users.
    Financial technology firm Robinhood set aside up to
one-third of its IPO shares for retail investors who used its
app ahead of its offering in 2021. The stock, which debuted at
$38 a share, ended the first day of trading at a lower price
before surging in the following weeks. As of Feb. 21, its shares
were trading more than 60% below its IPO price. 

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Graphic: Robinhood shares have slumped since its IPO Robinhood
shares have slumped since its IPO    https://reut.rs/3SRQ5x1
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 (Editing by Lauren Silva Laughlin and Sharon Lam)
 ((anita.ramaswamy@thomsonreuters.com))