22-3-2024 (NEW YORK) In a promising sign for initial public offerings (IPOs) of loss-making companies, social media platform Reddit saw its shares close 48% higher on its first day of trading in New York. Despite Reddit’s lack of annual profitability since its launch in 2005, investors were drawn to the company due to its positioning of content as training grounds for artificial intelligence (AI) programs. In February, Reddit also secured a data licensing deal with Google worth approximately US$60 million (S$80 million) per year.
Although advertising remains the primary revenue source for Reddit, the company highlighted AI as an area of growth during its IPO marketing roadshow. It was revealed last week that the US Federal Trade Commission is investigating Reddit’s AI data licensing deals.
Jen Wong, Reddit’s Chief Operations Officer, emphasized the company’s focus on growth, stating, “At the core, we are a growth company. Achieving our mission means that we want to grow users and community.”
Shares of Reddit, based in San Francisco, opened at US$47 on the New York Stock Exchange on March 21, surpassing the IPO price of US$34 (the upper end of the indicated price range). The day’s trading ended with shares valued at US$50.44.
With a valuation of US$6.4 billion, the IPO allowed Reddit and its selling shareholders to raise US$748 million. In a private fundraising round in 2021, the company was valued at US$10 billion. The successful stock market debut suggests that Reddit did not have to significantly reduce its valuation expectations to launch the IPO.
Reddit’s entrance into the public market has been long-awaited. The company confidentially filed for an IPO in December 2021 but faced delays due to a stock market downturn caused by the war in Ukraine and interest rate hikes by the Federal Reserve.
Assistant Professor Josh White of Vanderbilt University noted that investors’ willingness to overlook Reddit’s losses in favor of its growth potential is a trend not seen in at least three years. He stated, “We don’t get many large tech IPOs. Those tend to be very popular because it’s hard to buy that kind of growth.”
Reddit gained significant popularity during the “meme-stock” saga of 2021 when retail investors on its “wallstreetbets” forum collaborated to buy shares of heavily shorted companies like GameStop.
As part of its plan to reward users, Reddit allocated 8% of its shares to eligible users, moderators, certain board members, as well as friends and family members of employees and directors.
Additionally, Reddit offered shares to retail investors through online brokerage platforms such as Robinhood, SoFi Morgan Stanley Wealth Management, and Fidelity Brokerage Services. However, analysts have cautioned that this move carries risks. Typically, retail traders are unable to participate in IPO bidding and can only buy shares once they start trading.
Allowing early access to the IPO may dampen demand, and these buyers are not subject to a lock-up period, meaning they can sell their shares immediately, potentially increasing price volatility.
Alan Vaksman, founding partner at Launchbay Capital, stated, “I don’t know one company which really benefits from allocating shares to their users.”
According to Stocktwits.com, a social media firm that analyzes posts and message volumes related to a company’s ticker symbol, retail sentiment for Reddit is “extremely bullish.” However, discussions on Reddit’s wallstreetbets forum had a more mixed outlook, with some users stating they would short the stock after it starts trading.
Since its launch in 2005, Reddit has become a cornerstone of social media culture. Its iconic logo, featuring an alien on an orange background, is one of the most recognizable symbols on the internet.
With over 100,000 online forums called subreddits, Reddit hosts conversations on a wide range of topics, spanning from the sublime to the ridiculous, the trivial to the existential, and the comic to the serious. Co-founder and CEO Steve Huffman shared how he turned to one of the subreddits for help in quitting drinking, and even former US President Barack Obama participated in an AMA (ask me anything) on the site in 2012.
However, despite its cult-like status in the social media world, Reddit has struggled to replicate the success of its larger rivals, such as Meta Platforms’ Facebook and Elon Musk’s X.
Professor Reena Aggarwal, director of the Georgetown University Psaros Centre for Financial Markets and Policy, emphasized that the real test for Reddit will come after its first earnings call. She stated, “The real news is going to be after the first earnings call — where are they headed, what are the results looking like, what changes are they going to make.”
