Reddit prepared for its highly anticipated debut on the New York Stock Exchange on Thursday, testing investor interest in companies going public this year.
Based in San Francisco, California, Reddit priced its initial public offering (IPO) at the higher end of the $31 to $34 range, valuing the company at $6.4 billion. The IPO raised $748 million for the company and its selling shareholders.
Reddit’s highly anticipated public debut has been in progress for over two years. It initially filed for an IPO confidentially in December 2021, but the market downturn caused by the Federal Reserve’s quantitative tightening caused a postponement. This eagerly awaited debut will serve as a significant test for the IPO market, which is showing signs of improvement amid growing optimism about a gentle economic slowdown.
“If Reddit performs poorly in trading, it will create uncertainty for the IPO market. Several companies may delay their plans to go public,” stated Julian Klymochko, CEO of Accelerate Financial Technologies, an alternative investment solutions firm.
High-risk Retail Investment
During the 2021 ‘meme-stock’ frenzy, Reddit gained immense popularity as retail investors on its ‘wallstreetbets’ forum rallied to buy shares of heavily shorted companies like GameStop.
In a move to appreciate its user community, Reddit has allocated 8% of its shares to eligible users, moderators, select board members, and acquaintances of its employees and directors.
Additionally, it has allocated shares to retail investors through online brokerage platforms such as Robinhood, SoFi, Morgan Stanley Wealth Management, and Fidelity Brokerage Services.
However, analysts warn of potential risks. Traditionally excluded from participating in IPO bidding, retail traders, eager to invest in a newly listed company, often wait until trading begins, potentially causing a surge in the stock price on the first day.
Granting early access to the IPO might reduce demand. These buyers are also not bound by a lock-up period and could opt to sell once trading begins, potentially heightening price volatility.
“I haven’t seen any company that truly benefits from distributing shares to their users,” remarked Alan Vaksman, founding partner at investment firm Launchbay Capital.
According to Stocktwits.com, a social media platform analyzing posts and message volumes related to a company’s ticker symbol, retail sentiment toward Reddit was “extremely bullish.”
However, discussions on Reddit’s “wallstreetbets” forum were more varied, with some users indicating they would short the stock post-trading debut.
Cultural Sensation
Since its inception in 2005, Reddit has become a pivotal aspect of social media culture. Its distinctive logo, featuring an alien against an orange backdrop, stands as one of the internet’s most recognizable symbols.
With over 100,000 online forums known as “subreddits”, Reddit hosts discussions spanning a wide spectrum of topics, from the mundane to the profound, as described by co-founder and CEO Steve Huffman.
Huffman himself sought support on a subreddit to overcome alcohol addiction, a personal experience he shared in a letter. In 2012, former U.S. President Barack Obama engaged in an “AMA” (Ask Me Anything) session, an internet term for an interactive interview, with Reddit’s users.
According to Josh White, an assistant finance professor at Vanderbilt University, the current excitement surrounding technology stocks could provide a favorable beginning for Reddit’s IPO.
“We rarely see major tech IPOs. They’re typically in high demand due to the challenging nature of acquiring such rapid growth,” White explained.
Although Reddit holds a revered position in social media, it has struggled to achieve the same level of success as its larger counterparts like Meta Platforms’ Facebook and Elon Musk’s X.
Reddit has acknowledged that it’s still in the early phases of monetizing its business and has not yet generated an annual profit. Analysts anticipate that investors will closely examine its plans to achieve profitability.
“The significant developments will unfold post the initial earnings call – focusing on their trajectory, performance outcomes, and anticipated adjustments,” remarked Reena Aggarwal, who heads the Georgetown University Psaros Center for Financial Markets and Policy.
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