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The Reddit IPO: monetisation of user base will be key to success


General investor interest in Reddit has elevated after the company announced it had filed a confidential IPO application, which will likely take place in 2022. The company itself has said that once the regulator approves the application, it will then wait for the right time and market conditions for its market debut.

Founded in 2005, Reddit has reached a base of over 50 million daily active users. Since the short squeeze saga of early 2021, the company has become an important platform for the financial world, accommodating a market force that has captured considerable interest with Wall Street. Unofficial evidence suggests that Reddit generated more than $100 million in revenue in the second quarter of 2021, up almost 200% from a year earlier. So what can we expect over the coming months and how will this IPO impact the market?

Predicting growth within the market

It is important to pay attention to the growth rate of the company, as well as the margins of the business. These two metrics will help potential investors understand where Reddit’s business is at, and how well the funds are being used. A significantly low growth rate with high negative margins can indicate problems with the business itself.

Additionally, the monetisation of the user base is another important metric to value. Reddit is far from an industry leader, having only around 50 million active users per day compared to Twitter’s 200 million. Therefore, a more reflective and important indicator would be user engagement, and how quickly revenue per user grows on a quarterly/yearly basis.

Overall, the potential for growth is clearly there, but for investors, it would be better to wait for the official application from the company so that more substantial and official financial figures can be studied in greater detail.

Potential consequences for the financial market

Despite the company’s notoriety through its connection with “meme stocks” in the previous year, there is unlikely to be major consequences for Reddit as an IPO. Punishment from the regulator is unlikely because the company has no direct connection with the whole meme-stock situation. Reddit simply provided a forum for discussion. Similarly, any changes on the financial market are unlikely, as the emergence of meme-stock was in the background of high liquidity, zero trading fees, and low-interest rates.

In the future, the continuation of meme-stock popularity growth will be unlikely, as well as a continuation on the same scale as in the example of such stocks as GameStop and AMC.

Nevertheless, the experience has absolutely brought wider publicity to the company by attracting new advertisers and further growing its user base. Additionally, the company has become even more popular with private investors, but to say it has any great influence on the financial system would be an exaggeration at this point.

As we continue into the year there will be more information released about the IPO. But as we wait, it’s important to do your due diligence and research. If Reddit has strong fundamentals and you believe that company over the long term, then it is good to get in early. But never forget you are buying a company and not the hype around it.

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This article does not constitute investment advice. Make sure you do your own research or consult a professional advisor.

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