"In gambling the many must lose in order that the few may win," the British playwright and Nobel Prize winner George Bernard Shaw once said. This sentence not only applies to the classic casino, it can also be applied to the stock market. Around three years ago, private investors wanted to stand up to these "few winners" and agreed on the Reddit forum "Wallstreetbets" to buy shares in companies whose share prices hedge funds had bet on falling. The concerted actions, the most prominent example being GameStop, led to losses worth billions for some institutional investors. Reddit, on the other hand, saw a billion-euro valuation. The online forum recently made the leap to the stock market.
Reddit was founded in 2005 and has become extremely popular over the years. In the final quarter of 2023, an average of around 73 million people were active on the platform every day. However, the company is not just made up of Wallstreetbets; users discuss all kinds of topics in many forums. According to co-founder and CEO Steve Huffman, the more than 100,000 online forums, known as "subreddits", enable conversations on topics ranging from the "sublime to the ridiculous, the trivial to the existential, the comical to the serious".
The San Francisco-based company currently generates most of its revenue from advertising. Revenues amounted to USD 804 million last year, an increase of one fifth. It is expected to continue at this pace. According to the news agency Bloomberg, the company gave indications at a roadshow that revenue is set to increase by a further 20% in 2024. In addition, the break-even point on the basis of adjusted EBITDA is expected in the current year.
In addition to the upcoming break-even, Reddit also exudes fantasy with regard to artificial intelligence (AI). The technology was touted as a growth area at the IPO marketing roadshow. Reddit's content is already being offered as input for training and fine-tuning AI language models. Now the plan is to monetize this usage, meaning developers who want to access the company's data will have to pay a fee. According to Reuters, Reddit recently signed a data license agreement with Google worth around USD 60 million per year.
"Fundamentally, we are a growth company. In order to fulfill our mission, we want to increase the number of users and the community," COO Jen Wong recently stated as a guideline. However, Reddit is not only aiming for a large number of users, but also for quality. The company offers a premium membership for USD 6 per month, which allows users to remove advertisements from their feed, among other things. The more users choose this function, the higher the ARPU, i.e. the revenue per monthly user. This increased from USD 0.81 in 2021 to around USD 1.19 in 2022.
In general, Reddit is in a growth market. According to data specialist Statista, more than 4.59 billion people worldwide used social media in 2022, and this figure is expected to rise to almost 6 billion by 2027. The social media advertising market is moving upwards in sync with this. The global advertising volume is estimated at EUR 214 billion this year and is forecast to increase to EUR 317 billion by 2029, which corresponds to an expected annual growth rate of 8.2%.
Given these growth prospects, it comes as no surprise that the IPO on March 21 was a resounding success. The allotment took place at the upper end of the price range at USD 34 per share and valued the internet platform at USD 6.4 billion. However, this did not exhaust the potential of the 22 million shares on offer; the newcomer ended its first day of trading in New York up 48% at USD 50.44. Reddit also welcomed a prominent investor, ARK Invest, which snapped up almost 10,000 Reddit shares on its debut. A few days later, the stock even reached an all-time high of USD 63.75 on an intraday basis, which is almost double the IPO price.
Subsequently, however, a consolidation set in and the share price returned to the levels of the first trading day. Experts are also uncertain about the further development of the newcomer to the stock market. Initial assessments were made by the two US brokers Bernstein and Baird. The former took a skeptical view of Reddit's ability to become profitable and rated the stock as "underperform" with a price target of USD 40. Baird is slightly more optimistic and started with a "neutral" rating and a fair value of USD 50 due to the healthy user base and the potential for margin growth. The major banks Morgan Stanley, Goldman Sachs, JPMorgan and Bank of America, which accompanied the issue, will have to wait until mid-April for their initial assessment.
However, the big banks will not be the only ones to decide the future of Reddit shares. Traders on the social media platform could also have a say in the stock and include it in the club of "meme stocks", for example. However, while this is still a long way off and subject to uncertainty, it is already possible to hunt for profits with partial protection using yield optimization products. Basler Kantonalbank (rating: Fitch AAA, S&P AA+) has launched two new soft-callable barrier reverse convertibles with first-class conditions: the product denominated in Swiss francs offers the prospect of a high coupon of 20% p.a. with a maximum term of one year. The USD-denominated product yields an even higher return. This BRC yields an impressive 24% p.a. The barriers for both products are at 49% of the starting values, which in turn corresponds to a risk buffer of 51%. This means that the barrier is well below the IPO price. Due to the soft callable function, the maximum term can be reduced from one year to a maximum of 6 months.
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