Reddit IPO sees stock surging on debut trading day, closes up 48% 

On its debut trading day in New York, shares of the social media platform Reddit surged by 48%, indicating a potentially renewed interest among investors in the IPOs of promising — but loss-making — companies. 

The Reddit offering comes amid an IPO market that may be showing signs of thawing, with firms like Renaissance Capital saying last year that IPOs could be poised for an upswing in 2024 after a two-year slump brought about by high interest rates and geopolitical volatility. 

Since its launch in 2005, Reddit has yet to report a yearly profit. However, the company has attracted investor interest by promoting its content as a valuable resource for artificial intelligence (AI) training. According to reports last month, Reddit entered a data licensing deal with Google, valued at about $60 million annually. 

Despite its reliance on advertising as its primary source of income, Reddit has highlighted AI as a key growth area in its promotional IPO roadshow. It also disclosed last week that its AI data licensing agreements are under scrutiny by the U.S. Federal Trade Commission. 

"At the core we are a growth company. Achieving our mission means that we want to grow users and community," said Jen Wong, Chief Operations Officer at Reddit. 

The Reddit IPO saw the San Francisco-based firm's shares debut at $47 on the New York Stock Exchange (NYSE), following an IPO pricing of $34 per share, hitting the upper end of its projected range. Reddit shares closed their first trading day at $50.44. Reddit stock now trades on the NYSE under the ticker symbol RDDT. 

Reddit IPO sees social media firm valued at $6.4 billion 

The IPO assigned Reddit a valuation of $6.4 billion, with the company and its selling shareholders collectively raising $748 million. This comes after a 2021 private fundraising round valued Reddit at $10 billion, suggesting the IPO's strong market reception might have allowed the company to maintain higher valuation expectations. 

The Reddit IPO has been a long time coming. The company confidentially filed for an IPO in December 2021, but a stock rout caused by geopolitical tensions and interest rate hikes by the US Federal Reserve delayed its plans. 

Josh White, an assistant professor of finance at Vanderbilt University, told Reuters that the Reddit IPO represents a shift in investor sentiment, showing a willingness to overlook current losses in favor of potential future growth — a trend not seen for at least three years: 

"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 CFO Drew Vollero said that the company got a good window for its IPO. “I think that this is a great window for us to do it,” Vollero told MarketWatch in an interview Thursday. “I think that markets are ready for the best brands.” 

He also told MarketWatch that the company had swung to a profit between H1 and H2 2023: “What happened in the second half of last year, we became profitable”. Reddit, he said, lost $86 million in the first half of the year, but booked a profit of $16 million in the second half of 2023. “We swung over $100 million in just six months,” Vollero added. 

Platform users gain access to Reddit shares as part of IPO 

Reddit gained significant attention during the 2021 "meme-stock" phenomenon, which saw retail investors collaborate on its "wallstreetbets" forum to boost the stock prices of highly shorted companies like GameStop and AMC. 

As part of its plan to reward users, the company allocated 8% of the offered Reddit shares to eligible users, moderators, board members, and affiliates of employees and directors, also making shares available to retail investors via platforms like Robinhood and SoFi. 

However, analysts caution that such early access for retail investors, typically excluded from IPO bidding, may temper demand and increase volatility due to the absence of a lock-up period for these shares. 

Alan Vaksman, founding partner at Launchbay Capital, told Reuters that he was skeptical of the benefits of distributing shares to users: 

"I don't know one company which really benefits from allocating shares to their users”. 

Meanwhile, analysis by Stocktwits.com shows “extremely bullish” retail sentiment towards Reddit. Opinions on Reddit’s "wallstreetbets" forum are varied, with some users planning to short the stock after it started trading. 

What is Reddit? 

Reddit is a social news website and forum where stories are curated and promoted by its users. The platform’s name is a play on the words "I read it." 

Reddit site members, also known as redditors, submit content then voted on by other members. The goal is to send well-regarded content to the top of the site's front page. 

The platform is made up of over 100,000 topic-focused communities, known as “subreddits,” which each follow their own rules and culture.  

Since its launch in 2005, Reddit has established itself as a pillar of social media, known for its iconic logo and vast range of forums covering a wide array of topics. Co-founder and CEO Steve Huffman has credited a subreddit with helping him quit drinking. The platform has also hosted notable figures like former U.S. President Barack Obama, who did an AMA (“ask me anything”) with the site’s users in 2012. 

Despite its influential role in digital culture, Reddit has yet to achieve the commercial success of larger rivals like Meta Platforms' Facebook and Elon Musk's X. 

"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," Reena Aggarwal, director of the Georgetown University Psaros Center for Financial Markets and Policy, told Reuters.