Sun. Apr 21st, 2024

Two years ago, Reddit users established themselves as a fearsome economic force when the subreddit community WallStreetBets mobilized to save GameStop’s stock price from pessimistic Wall Street traders. Now, Reddit itself is hoping to tap into its users’ unruly energy by allowing them to participate in the company’s IPO. Reddit filed to go public last Thursday, seeking a valuation of at least $5 billion. Crucially, the company said it would set aside a large number of shares for 75,000 of the company’s most prolific users, who might be able to profit off the company’s financial success and have a seat at the company table. “Now you can become one of our (non-corporate) overlords,” Reddit wrote in a public statement. 

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But rather than galvanizing the community, the news was met with fierce backlash and pessimism from many Redditors. Users on various subreddits responded by casting doubt on the company’s business model, complaining about recent changes to the site, and ironically threatening to wield their collective power to bet against the company’s stock. The overwhelming negativity from Reddit’s own community highlights the risk of the company’s decision to go public and the challenges of social media companies keeping both their investors and users happy at the same time. 

User Backlash

Reddit is one of the most-visited websites in the U.S., with 73.1 million daily active users. But the company is still unprofitable: While it grew 21% in revenue last year, it also lost more than $90 million—although that was an improvement on the $158 million it lost the year before. Compared to Instagram, X and other social media platforms, Reddit has especially struggled to monetize its audience through ads, partially because its content is generally more freewheeling and untamed than its counterparts. 

Read More: Reddit Allows Hate Speech to Flourish in Its Global Forums, Moderators Say

The company has many high-profile backers, including Tencent Holdings, Fidelity, and OpenAI CEO Sam Altman, who was once briefly Reddit’s CEO. Morgan Stanley and Goldman Sachs will serve as the offering’s lead underwriters. But very few companies have even decided to go public in the last few years, due to a turbulent stock market and high interest rates. Reddit will be the first major tech initial public offering of 2024, and the first social media IPO since Pinterest in 2019. 

Reddit is powered by users who post content and moderate the site for free. (Last fall, Reddit announced that users who created viral posts would be able to earn money.) And while Redditors tend to be intensely devoted to their subreddits, many have grown increasingly disillusioned with the platform overall. Last summer, hundreds of Reddit communities engaged in a widespread blackout to protest price changes for third-party app developers. 

Now, many Redditors see the IPO as another example of how the company is prioritizing its bottom line at the expense of its users. “If anything I think it devalues Reddit because now the board has to do things for investors instead of doing things for the Reddit community,” wrote one user

Ed Zitron, the CEO of EZPR who also publishes analysis on tech and social media via a podcast and a Substack, argues that Reddit’s lack of focus on monetization is exactly what makes it so special as a platform. “Reddit is one of the last bastions of user-generated content on the internet that’s actually reliable and well-policed,” he says. “But the current way Reddit works is antithetical to good advertising.” 

In order to try to make the community feel included in the IPO, Reddit has established a “Directed Shares Program,” which lets the most active Redditors buy shares at the same discounted price as major investors. But many Redditors responded to that idea with disdain as well. “They’re trying to trick us into buying their stock to pump the price,” wrote one user. Another compared the program to a company throwing a pizza party for its workers, but then forcing its workers to buy the pizza. 

One Redditor, JapanStar49, wrote in a message to TIME that they were invited by Reddit to participate in the IPO, but have no plans to buy any shares. JapanStar49 is a moderator for r/LegacyJailbreak, a community with 45,000 members that offers tips about circumventing software restrictions on Apple devices. The user said that recent changes to Reddit have made it harder for moderators to lead their community. “I’m not optimistic and find it very ironic that they want to invite moderators to participate in the IPO after making changes that have prevented my fellow moderators from moderating,” they wrote. 

A spokesperson for Reddit did not respond to a request for comment. A spokesperson for Goldman Sachs declined to comment. A spokesperson for Morgan Stanley did not respond to a request for comment. 

Training Artificial Intelligence

As is the case with many business decisions this year, artificial intelligence is playing a role in Reddit’s decision to go public. Reddit just announced a licensing deal for Google to use Reddit data to train and build its A.I. systems. Steve Huffman, Reddit’s CEO, said in a public letter that the platform’s “data advantage” in training AI models will allow the company to earn revenue. Reddit expects to make more $203 million over the next three years from data licensing agreements, according to the IPO filing.

But on Reddit, users voiced concern that AI advances could only increase the proliferation of chatbots on the site. One user speculated that Reddit could be particularly susceptible to an increase in bots compared with other social media platforms, because most of its users are anonymous, reducing the site’s appeal. 

Zitron says that Reddit’s issues with bots aren’t unique, but potentially damaging all the same. “Like any other social media platform, there are forces at play who are going to spam it with nonsense and manipulate Reddit to their advantage,” Zitron says. “If it’s AI that’s upvoting and downvoting posts, that will destroy the fabric of what makes Reddit useful.”

Nick Smith, a senior research analyst at the IPO-focused Renaissance Capital, says that Reddit’s data partnerships will help contribute to the company’s growth and profitability. “But it’s down an uncertain path,” he says. “Reddit is highly unprofitable: Over the last 3 years, it hemorrhaged more than $300 million in free cash flow. That’s one of the big issues, because investors are focused on profitability, and being more discerning in that aspect.”

The Wall Street Bets factor

Looming over Reddit’s IPO is the subreddit r/WallStreetBets, which is one of the platform’s biggest and most powerful communities. In 2021, its users banded together to invest in “meme stocks” like GameStop and AMC, wreaking havoc on Wall Street trading firms that had bet against them. Their actions forced major investors to rethink the very premise of what made a stock valuable. 

If r/WallStreetBets gets involved in the Reddit IPO, the community holds the collective power to move the company’s stock price in unpredictable ways. While professional investors participating in IPOs typically hold shares for a long time, individual investors often sell shares more actively, leading to price swings. Reddit acknowledged this in its IPO filing, writing in its Risk Factors section that the participation of Redditors could “result in increased volatility.” 

In 2021, Robinhood, a stock trading app that itself was lifted up by r/WallStreetBets, went public and similarly allowed its ravenous users access to the IPO. But Robinhood’s stock price dropped significantly after going public and has failed to come close to its IPO price. 

The Robinhood IPO saga did not go unnoticed by WallStreetBets—and many people on that subreddit responded scathingly to Reddit’s own IPO announcement. Users especially took umbrage with Huffman’s more than $193 million compensation in 2023 (including stock and option awards), while volunteer moderators who do the heavy lifting of organizing and overseeing the site’s communities make nothing. Many users actually threatened to “short” Reddit’s stock: to bet on its failure. “They’re selling user generated content to AI companies without offering user compensation,” wrote one user, adding: “Short these pricks.”

Smith believes it will be difficult and expensive for retail investors to actually short sell—effectively bet against—Reddit’s IPO in its initial trading days. But he says that institutional investors are monitoring the negative sentiment around the announcement and how it might impact Reddit’s profitability. “If the user anger translates into either slow or negative user growth, that will be a problem for institutional investors,” he says.

However, there are some users who still believe in the site’s viability and the potential of the IPO to be successful. One user, who said his name was Kevon but asked to remain anonymous over concerns about his job and personal life, wrote to TIME in a direct message that he planned to buy shares in the IPO, believing that the current negative sentiment was more of a product of Reddit’s tendency to devolve into hivemind than any actual expertise or insight. “Every year there are comments that the site/company are going downhill from what it used to be,” he wrote. “Yet it continues to grow at a rapid pace.”

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