The stock market is always full of surprises, and the social media platform, Reddit, has provided the latest twist. In a dramatic surge, Reddit’s shares rose by 38% above their initial public offering (IPO) price, propelling the company’s valuation to almost $9 billion.
The spotlight was on Reddit on March 21, 2024, as its shares made a grand entrance on the New York Stock Exchange (NYSE). The 38% jump in share prices showcased the renewed investor interest in IPOs of promising yet unprofitable companies.
“At its heart, Reddit is a growth company. Our mission is to expand our user base and community,” said Jen Wong, Reddit’s Chief Operations Officer.
While Reddit garners most of its revenue from advertising, it has been keen to position its content as a fertile ground for developing Artificial Intelligence (AI) programs. This has attracted a lot of investor attention.
Last month, Reuters reported that Reddit had struck an annual data licensing agreement with Google, valued at approximately $60 million. However, the Federal Trade Commission is currently scrutinizing Reddit’s AI data licensing deals.
Reddit’s shares opened at $47 on the NYSE, a substantial leap from the IPO pricing of $34. As trading progressed, the shares touched the $50 mark. The IPO valued Reddit at $6.4 billion, and the company, along with its selling shareholders, raised $748 million.
“If Reddit’s performance is underwhelming, it could cast a shadow over the IPO market. Many companies might put their IPO plans on hold,” warned Julian Klymochko, CEO of Accelerate Financial Technologies.
Reddit’s journey to becoming a publicly-traded company has been over two years in the making. It initially filed for an IPO confidentially in December 2021. A stock market downturn triggered by the Federal Reserve’s quantitative tightening led to a delay in the process.
Reddit’s popularity surged during the “meme-stock” saga of 2021, where a group of retail investors collaborated on its “wallstreetbets” forum to buy shares of heavily shorted companies like GameStop.
To reward its user base, Reddit reserved 8% of the shares on offer for eligible users and moderators, certain board members, and friends and family members of its employees and directors. Some shares were also offered to retail investors through online brokerage platforms like Robinhood, SoFi Morgan Stanley Wealth Management, and Fidelity Brokerage Services.
This move, however, is not without risks. Analysts have expressed concerns over this strategy, as there’s no lock-up period for such buyers. They could choose to sell when the stock starts trading, potentially increasing price volatility.
“I don’t know of a single company that truly benefits from allocating shares to their users,” observed Alan Vaksman, a founding partner at investment firm Launchbay Capital.
Since its inception in 2005, Reddit has established itself as a cornerstone of social media culture. Its iconic logo, featuring an alien against an orange background, is one of the most recognized symbols on the internet. The platform hosts over 100,000 online forums, known as “subreddits,” covering a wide range of topics.
“From the sublime to the ridiculous, the trivial to the existential, the comic to the serious – our subreddits cater to all,” said Reddit’s co-founder and CEO, Steve Huffman.
