Reddit float feeds on meme stock craze

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FILE PHOTO - Reddit app is seen on a smartphone in this illustration taken, July 13, 2021. REUTERS/Dado Ruvic/Illustration

NEW YORK, Dec 16 (Reuters Breakingviews) - The meme stock craze has inflated the values of companies like GameStop (GME.N) and AMC Entertainment (AMC.N). Now Reddit is hoping the same will apply to a platform where the memes are created. Long been in the shadow of Meta Platforms' (FB.O) Facebook, the social network is planning to go public. To justify seeking a possible valuation of $15 billion read more , as reported by Reuters, it needs to prove its midlife resurgence won’t become a crisis.

Reddit was founded in 2005, a year after Facebook. Yet in early 2019, a funding round valued it at only $3 billion. While its message boards had devoted fans, they numbered just 36 million daily active users, while Mark Zuckerberg’s network had about 50 times as many.

Meme stocks tend to attract followers through communities like wallstreetbets on Reddit, and the effect works the other way, too. As users increase in number, so does advertising revenue. Reddit said it had $100 million of ad income in the second quarter, about three times more than in the same period the year before.

That's a $400 million annual run rate. Assuming growth slows slightly but that still doubles next year. At $15 billion, Reddit would be valued at roughly 20 times revenue. That’s about three times the multiple of Meta Platforms, which is far larger but growing at a slower annual clip of around 35%.

Sustaining that kind of gap requires durable, rapid growth. Trading platform Robinhood Markets (HOOD.O) went public in July, partly fueled by meme stock activity. Its shares are down by almost half from its initial public offering price. GameStop and AMC shares have both slumped around two-thirds from this year's highs.

Perhaps traders who use Reddit's message boards have simply turned their attention to other targets. Or maybe once people get a taste for Reddit, they will stick around through both bull and bear markets. The danger, though, is that Reddit’s midlife surge doesn't last.

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CONTEXT NEWS

- Reddit said on Dec. 15 it had confidentially filed paperwork for an initial public offering with the U.S. Securities and Exchange Commission.

- The social media network, founded in 2005, was valued at more than $10 billion in a funding round in August. A source told Reuters in September that the company hoped to be valued at $15 billion when it went public. An earlier funding round in February valued Reddit at around $6 billion, according to Reuters.

- The company reported $100 million in advertising revenue in the second quarter, almost three times as much as the same period a year ago.

Editing by Richard Beales and Sharon Lam

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