• The Seville Reporters

IPOs 2022: The Social Industry

Updated: Feb 5


  • 2021 was a hot year for IPOs, can we expect a repeat in 2022?


  • The three companies within the social media industry that plan to go public in 2022.


  • The companies attracted millions of dollars from private investors, but will the investment appeal translate to public markets?


  • The one company stands out among the three as a good investment opportunity.




2021 was another hot year for IPOs. According to Ernst & Young, over 2300 companies went public last year, raising over $450 billion.


There's an interesting list of companies that plan to go public in 2022, but there's no guarantee any of them will make it to market. The S&P 500 ($^GSPC) is down 7% from its close in 2021. The down days in the market have been violent and and in succession, with only a few up days mixed in. Typically, CEOs and those that advise them prefer to go public when markets are moving up, which means if 2022 is a down year for markets, it will be a down year for IPOs as well.


Like most years, this year's IPO list is a mixed bag of well-known, known, and not so well known companies, too many to discuss in one article. Here, I'll cover three companies in the social media space that investors should keep their eyes on.





Discord

Discord is the chat platform that investors were hoping Twitter ($TWTR) would morph into and what Meta ($FB) was hoping it could become for a new generation of Facebook users. Discord was initially established for gamers, but has transformed itself into something bigger. Teachers and educators are using Discord servers to share information with students or school clubs. YouTubers are creating Discord servers to share information with their faithful followers, and that is just a small demographic of what you can find on Discord. Anyone who has a following, or wants to curate a following and establish a community around its brand, is using Discord or should be using Discord.


The Numbers

Discord raised $500 million in September of 2021, and now has a valuation between $15-$17 billion. The platform has 140 million daily active users, which according to this list puts Discord's MAUs behind Quora, SnapChat ($SNAP) and Pinterest ($PINS), but the company is growing rapidly. Discord doubled its number of users between December 2019 and December 2020. Total revenue for 2020 came in at $130 million according to Forbes. In addition, the company isn't totally reliant on advertising revenue. For as little as $4.99 a month users can upgrade to one of Discord's premium services.



The Investment Appeal

In the early parts of 2021 Microsoft ($MSFT) attempted to acquire Discord for $12 billion, but was rejected by the company. Microsoft's bid confirmed that there is value in what Discord has built.


Aside from the company being an acquisition target, its appeal lies in its ability to serve a large market. Businesses, educators, gamers, influencers and everything in between can use Discord to share information and build relationships and communities.



In Relation to the Markets

At a private valuation that stands between $15 and $17 billion, Discord is in the ballpark of Domino's ($DPZ) which has a market cap of ~$16 billion and Wayfair ($W) which has a market cap of ~$15 billion. Is Discord more valuable than Domino's? Probably. Investors have spent the last decade putting a premium on subscriptions, MAU's, and community, which is why the stock prices of Netflix ($NFLX) (subscription and MAUs) and Facebook (MAUs and community) have skyrocketed over the past 10 years, with Netflix gaining over 3,700% and Facebook gaining over 600% since it's IPO in May of 2012 .


Market Threats

This area of the market is very competitive. Facebook, Twitch, Twitter, Reddit, are all trying to entice users to spend / waste time on their platforms. Discord has a niche, but I wouldn't call it a moat. Some of the bigger companies in this space could easily create a Discord-like feature for their users.





Reddit

Reddit has made the list of companies planning to go public for the past several years, but the company never takes the leap. This time last year, Reddit was the talk of Wall Street and Main Street after the meteoric rise of GameStop's ($GME) stock price. Late January to early February 2021 seemed like the perfect time to go public and take advantage of the free press, but Reddit held off. 2022 seems like the year that the Reddit IPO happens. Late last year the company filed its paperwork with the Securities and Exchange Commission (SEC).


The Numbers

Reddit was able to raise $700 million in its last round of funding, putting the company's valuation at $10 billion. According to backlinko.com Reddit has 430 million monthly active users, which is more than Quora and just slightly less than Twitter's MAU count. Revenue in Q2 2021 came in at $100 million, which was a 192% increase versus revenue in Q2 2020. It was a big quarter for Reddit in terms of year-over-year growth, but the company's revenue still pales in comparison to SNAP's ($SNAP) revenue of $982 million in Q2 2021 and Pinterest's ($PINS) revenue of $613 million during the same quarter.



The Investment Appeal

In 2020, Reddit received 20 billion screen views per month, which is a lot of views, and the company still has lots of room to grow. According to Pew Research, only 18% of Americans use Reddit, whereas 69% of Americans use Facebook. Meme stock mania of 2021, which sent stock prices skyrocketing, was rooted in Reddit. The sight of average folks beating market professionals and becoming rich in the process made people want to join the party. Reddit's daily active users jumped to 53 million in 2021 from 36 million in 2020.


In Relation to the Markets

At a $10 billion valuation that puts Reddit in the area of names we know like Hyatt ($H), which has a market cap of $9.8 billion, Avis ($CAR) with a market cap of $9.3 billion, Dicks Sporting Goods ($DKS),which comes in at $9.8 billion, Dropbox ($DBX) at $9.1 billion, and Asana ($ASNA) with an $8.9 billion market cap. However, a better comparable is Pinterest, which went public in 2019 at a $10 billion valuation. Out of the gate, Pinterest's stock did pretty well, but by August 2019 the stock started to sell off, and didn't recover until the March 2020 rally, where it moved from a low of $10.10 to a high of $89.00 per share in an 11 months period. Pinterest, also relied heavily on advertising dollars, but is now building a social commerce feature, which should help them diversify their revenue stream, can Reddit do the same or something similar?


Market Threats

Reddit is competing with Facebook, Twitter, Discord, and Quora. Like Facebook, Reddit has the MAUs and community factor working for it, but in order for it to be a stock market success, it will need to significantly increase its MAUs and find ways to diversify its revenue stream.





Quora

Quora, the social question-and-answer site founded by two former Facebook employees, is on the list of companies to go public in 2022. The company held meetings with investment banks in late 2021 according to Reuters to explore their path to the public markets.


The Numbers

Quora has 300 million monthly active users and raised $60 million in 2019 at a $2 billion valuation. In 2018 the company reported $20 million in revenue, and hasn't released any updated revenue numbers since.

The Investment Appeal

300 million people looking for information is the appeal of Quora. Typically, users don't go to Quora to be entertained like they do when they open TikTok. There's no community of apes like on Reddit, and your family isn't there like on Facebook.

People go to Quora looking for answers,

which makes it an ideal place to advertise.


If you're looking for information on what an IPO is or how an IPO works on Quora, that question-and-answer feed is the best place for Robinhood, WeBull or any other investment platform to place an advertisement. Even the less serious questions, like why Batman did something in a movie from 1989, provides Warner Bros and D.C. Comics with an opportunity.


Another appealing quality of Quora, which it has over most other platforms, is the content ages well. A question asked in 2018, like "What is the best diaper brand for newborns?" is still getting viewed and commented on years after it was posted. These everyday questions that are being answered by everyday people, and not by companies that paid Google to be at the top of the search results has value.



In Relation to the Markets

For companies that the average person would know with a valuation close to Quora's, there is Tootsie Roll Industries ($TR) and Spirit Airlines ($SAVE), both with a $2.2 billion market cap, and Abercrombie and Fitch ($ANF), which has a $2 billion market cap. Tootsie Roll has traded in a range for several years, but Spirit Airlines has been deeply discounted due to the pandemic, while Abercrombie and Fitch's stock has declined 21% since last June. These companies have fallen to $2 billion, but the market has valued them for much more in the past. At $2 billion, Quora is valued at 100x its 2018 sales, Spirit Airline currently trades at 1.2x sales. Between now and the time it goes public, investors will need to figure out if $2 billion is the mountain top of Quora's valuation, a deep discount to it's true value, or somewhere in-between.


Market Threats

Quora is competing for people's attention with Facebook, Twitter, Discord, and Reddit. Reddit may be the closest to Quora in terms of value for the user, with Facebook, specifically Facebook groups not far behind.



My Take

If I had to invest in one of the social platforms of the three covered, it would be Discord. I believe Discord has a lot of room to grow its offering, it's already transformed itself from a gamers communication tool to a place where anyone with a following can foster a community, gamer or not. As someone who watches a lot of YouTube, four times as much YouTube as television, the phrase I've heard more and more over the past nine months is, "Join us on our Discord server..."


Reddit would be the investment I'd be the most scared to make for a few reasons. As someone who is learning to program, I rely on Reddit heavily. It is an incredibly useful application, but it lacks a bit of cool that I've seen other apps brandish in the past.


I remember vividly the mania that surrounded Facebook when it opened the platform up to everyone. I also remember the hype around Twitter when Ashton Kutcher reached one million followers on the platform, and even SnapChat before it was a public company, it was the app of teens and pre-teens everywhere. Reddit doesn't have any of that. Meme stock mania was the first time I'd noticed there being a rush to join Reddit.


Also, Reddit isn't founder led, Reddit was sold by its founders to Condé Nast in 2006 for between $10 and $20 million. This is probably the reason why it's missing that cool factor. Founders and creators focus on making something cool that their users will enjoy, conglomerates have bills to pay, so they focus on what they can do to pay those bills. A great example of this is Mark Zuckerberg at Facebook. He saw the cool factor in Instagram and acquired it for $1 billion, even though Wall Street thought it was a bad idea, and that he overpaid for the app. Instagram currently has an estimated value of over $100 billion. Founders understand cool, conglomerates don't.


Quora isn't a hard pass, but it's definitely a wait and see. The founders weren't fans of advertisements cluttering up the feed, so they were slow to add them to the platform In addition they haven't figured out any other significant way to bring in dollars, and they've been around since 2009.


Quora feels like it's limping to the finish line, which is the IPO, where its founders and insiders can cash out and leave the general public holding the bag.


Quora is the company that I believe is the most likely to be acquired not too long into its life as a public company. Scott Galloway did a piece last year on Super-Apps. They're big in China, but haven't quite made it to the U.S. yet, though Block ($SQ), formerly known as Square, is trying to change that. I think Block acquires Quora and adds another piece to its super app.




New Year, New Opportunity

The right IPO can be life changing, but don't feel pressured to buy on the day the company goes public. I had a great year in 2020 from picking up beaten down IPOs from 2019, you can see the charts and read the full story here. Sometimes waiting a beat allows you to catch an unbelievable deal in the markets.


When it comes to IPOs, don't believe the hype unless it's coming from the customers or users of the product or app. Typically the hype around an IPO is from the insiders who have been invested for years and are ready to cash out and move on. Don't take the bait, be weary of insider hype.


IPOs are great at creating wealth for some and making money disappear for others. If you're investing, you know investing is a risky game with no guarantees, and that sentiment is heightened when it comes to IPOs. What was a hot unicorn to the private sector can easily become a mule in the public markets. Proceed with caution.







60 views0 comments

Recent Posts

See All