The shares of social networking platform Reddit surged 48% at the end of its first trading day in New York, suggesting that investors may once again be interested in initial public offerings (IPOs) of promising but financially struggling businesses.
Reddit enticed investors by presenting its material as a training environment for artificial intelligence (AI) systems, despite the fact that it has not produced an annual profit since its founding in 2005. According to a report last month, Reddit and Google have reached a data license agreement worth roughly $60 million a year.
Reddit highlighted artificial intelligence (AI) as a growing field during its IPO marketing roadshow, despite the fact that the great majority of its income still comes from advertising. Additionally, it revealed last week that the Federal Trade Commission of the United States is investigating its deals for AI data licensing.
The San Francisco-based company's shares debuted at $47 on the NYSE on Thursday, after an IPO price of $34, which was the top end of the company's stated price range. They closed trading at $50.44.
The company and its selling stockholders raised $748 million, and Reddit was valued at $6.4 billion in the IPO. Reddit's 2021 private financing round valued the firm at $10 billion, and the positive reaction from the stock market suggested that the company might not have needed to lower its valuation projections as much to launch the initial public offering.
It has taken quite a long time for Reddit to enter the public market. In December 2021, it filed for an IPO confidentially. However, a stock market meltdown brought on by Russia's war in Ukraine and the Fed's interest rate hikes froze the IPO market and forced it to postpone.
Reddit's IPO demonstrated that, for the first time in at least three years, investors were prepared to overlook the company's losses given its potential growth.
White said that big tech IPOs are rare, and they are typically very popular as it's difficult to purchase that kind of growth.
Risky retail investor allocation
Reddit's popularity reached new heights in the 2021 "meme-stock" saga, when a group of investors pooled their resources on the forum "wallstreetbets" to purchase stocks of highly shorted businesses like GameStop.
As part of its user incentive program, Reddit has set aside 8% of the available shares for moderators and other qualified users, select board members, and the friends and families of directors and employees.
Via online brokerage services like Fidelity Brokerage Services, Morgan Stanley Wealth Management, SoFi, and Robinhood, it also made some shares available to retail investors.
However, experts have warned that there are several risks associated with the move. Retail traders waiting to learn about a newly-listed firm buy stocks only when they begin trading, as they are typically excluded from bidding during an IPO.
Pre-IPO access may reduce demand in some cases. Since these purchasers are not bound by a lock-up period, they may decide to sell as soon as the stock opens for trade, which could lead to an increase in price volatility.
Alan Vaksman, founding partner of investment firm Launchbay Capital, said that he does not know any company that truly gains from distributing shares to its users.
The social media company Stocktwits.com, which tracks message volumes and posts on its platform connected to a firm's ticker symbol, revealed that the retail mood on Reddit was highly bullish.
Cultural phenomenon
After its 2005 launch, Reddit quickly became a significant player in the social media culture. Its widely recognized emblem, an alien against an orange background, is one of the most famous pictures on the internet.
According to co-founder and chief executive officer Steve Huffman, its 100,000 online forums, or "subreddits," facilitate discussions on a wide range of subjects, from the sublime to the absurd, the mundane to the existential, and the comical to the serious.
According to Huffman's letter, he himself sought assistance from one of the subreddits to stop drinking.
Although the company has become almost like a cult in the field of social media, it hasn't been able to reproduce the success achieved by its bigger rivals, such as Elon Musk's X, Meta Platforms, and Facebook.
Reena Aggarwal, head of Georgetown University's Psaros Center for Financial Markets and Policy, said the actual news will come after the first earnings call, including where they're heading, what the results look like, and what changes they plan to make.