Meta Platforms (META) sold shares to the public via an initial public offering (IPO) for the first time back in 2012.

At that time, the company was known as Facebook.

The stock fell after the launch. It disappointed investors. And it became known as one of the worst IPO flops of all time.

As we recall, it was only after its IPO the company admitted it didn’t have an advertising function for its mobile product.

Or something like that.

Anyway, we didn’t care about that. We told investors to buy. We could see the addictive nature of it and could understand the “network effect” of millions of people flocking to the platform.

Our advice looked like a dumb idea at the time… as the stock continued to fall. But not so much now.

As for the latest IPO, that of Reddit (RDDT), our advice this time? Don’t bother. We’ll explain why below.

Getting Tech Right Is a Toss-Up

One thing we should say… Before you think we’re a genius for saying we recommended Facebook stock when it was $30 or so (today it trades around $500)…

We confess to totally whiffing on Google (whose parent company today is Alphabet (GOOG)).

We still remember placing an order to buy at $85 on the day of the IPO. (Around $3 based on today’s price when accounting for stock splits.)

As we recall, the stock traded to a low of around $95… never getting anywhere near our limit price.

Perhaps it was stubbornness, or more likely ignorance, but we couldn’t bring ourselves to pay any more than $85.

What a dumb move.

Even a $5,000 investment back then would be worth more than $237,000 today.

Hey-ho.

In terms of track record on Big Tech IPOs… we guess we’re one-and-one.

So, if you’re looking to your editor for guidance on whether Reddit’s IPO will be a bonanza or a bust… we’re happy to offer it… Just know the chance of us getting it right (based on our Facebook and Google calls) is bang on 50%.

But since when did a 50-50 track record stop a newsletter prognosticator from, well, prognosticating? Your answer is, never.

The Case for Reddit Isn’t There

The truth is, we won’t pretend to understand Reddit.

We’re familiar with its existence. And we know it had its mainstream “breakthrough” moment in 2020 as part of the whole meme-stocks nonsense. Forgive us if we don’t cover that ground again. It’s so boring.

Looking at it, it seems to be a cross between Facebook, Instagram, X, and some kind of 1990s message board service. In other words, all its content is submitted by contributors.

Put it this way, to say it’s worth $8 billion (based on its current market capitalization) is ludicrous.

The company has been around since 2005. It was founded five years before Instagram (now owned by Meta), six years before Snapchat, and one year before X. For further reference, Facebook was founded in 2004, one year before Reddit.

In all that time, it has built a business that in 2023 generated just $804 million in revenue for a net loss of $90 million. That’s compared to a $158 million loss the year before.

And yes, revenue has nearly doubled over the past two years… But operating expenses are up 70%, too. The cynic in us says the owners were “fattening the pig” for sale.

Looking further at Reddit’s income statement and balance sheet, one of the big drivers for its increased earnings (lower loss), is an increase in interest earned from its investments.

In other words, the Federal Reserve’s interest rate increase cycle has directly benefited Reddit… arguably more than anything Reddit, as a business, has done.

In 2022, Reddit earned $15.7 million in interest income. Last year, it earned $53.3 million. That’s despite overall cash and investments remaining mostly the same.

Thumbs down to the product guys at Reddit, and thumbs up to the chief financial officer for making the cash “work” in some fixed-interest securities!

Look, we could be completely wrong on this. The bullish case would likely argue that Reddit has very little debt on its books. In fact, pretty much nothing in terms of borrowings.

Compare that to Meta. Meta has around $19 billion in borrowings, with a total debt-to-equity ratio of 24 times. (Note: equity means the company’s total assets minus total liabilities. The debt-to-equity ratio then becomes a useful gauge to measure a company’s indebtedness.)

Reddit’s total debt-to-equity ratio is 1.5 times. So with a little financial engineering, the bulls would argue there is huge potential to take on debt and invest for growth.

Fine. But to do what? To grow where? To grow the current business model? How would more debt help with that?

To enter new markets, perhaps? Sure, but we know what happens when tech companies try to diversify into other markets…

Apple just announced it’s closing its EV (electric vehicle) project after spending a decade and $12 billion on it.

Meta spent more than $10 billion on the whole metaverse lark… writing the value of that investment down to zero last year.

And Google’s efforts to corner AI (artificial intelligence) came embarrassingly unstuck with the AI images fiasco. You know the one. It served up AI-generated images of black Nazis and female popes… and refused to show images of “happy white families!”

So, you’ll forgive our skepticism on that score.

Bottom line, we’ll forgo the opportunity to invest in Reddit. If an analyst out there can make a believable bullish case for it, we’re happy to listen.

But right now, we’ll gladly leave it off our recommended list. We’ll check back in on it a year from now to see how it’s going!

Regards,

Kris Sayce
Editor, Legacy Research