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Reddit Soars 48% on NYSE Opening After Selling Shares at High End of Range

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Reddit Soars 48% on NYSE Opening After Selling Shares at High End of Range

In its first initial public offering for a major social media company since Pinterest went public in 2019, Reddit saw its shares surge by 48% during its debut on Thursday. The 19-year-old platform, which hosts millions of online forums, priced its IPO at $34 per share on Wednesday, at the high end of the anticipated range. From the offering, Reddit and its selling shareholders collectively raised around $750 million, with the company itself securing approximately $519 million.

The stock began trading at $47 and reached a peak of $57.80, representing a 70% increase at its highest point of the day. It concluded the trading day at $50.44, resulting in a market capitalization of approximately $9.5 billion for the company. Trading under the ticker symbol “RDDT,” Reddit is gauging investor interest in new tech stocks following a prolonged period without significant IPOs. Since the pinnacle of the technology boom in late 2021, few venture-backed tech firms have gone public, and those that did, such as Instacart and Klaviyo last year, failed to meet expectations. On Wednesday, data center hardware company Astera Labs made its debut on the Nasdaq stock exchange, witnessing a 72% surge in its share price. This highlights investors’ enthusiasm for companies associated with the artificial intelligence boom.

At its IPO price, Reddit was valued at approximately $6.5 billion, a decrease from its private market valuation of $10 billion in 2021, a year characterized by a tech industry boom. However, the sentiment shifted in 2022 due to increasing interest rates and surging inflation, prompting investors to retreat from high-risk assets. In response, startups implemented layoffs, reduced their valuations, and prioritized profitability over growth. According to the company’s prospectus, Reddit’s annual sales for 2023 increased by 20% to $804 million from $666.7 million the previous year. The company reported a net loss of $90.8 million for the last year, which is narrower than the loss of $158.6 million in 2022.

Reddit’s market capitalization at IPO, based on its revenue over the previous four quarters, resulted in a price-to-sales ratio of approximately 8. For comparison, Alphabet trades at 6.1 times its revenue, Meta has a multiple of 9.7, Pinterest’s ratio is 7.5, and Snap trades at 3.9 times its sales, according to FactSet data. In its prospectus, Reddit identifies competitors such as X, Discord, Wikipedia, and Amazon’s Twitch streaming service, in addition to the aforementioned companies.

Reddit is banking on data licensing to potentially become a significant revenue stream. The company stated in its filing that it has secured “certain data licensing agreements with a total contract value of $203.0 million, with durations ranging from two to three years.” For this year, Reddit anticipates recognizing approximately $66.4 million in revenue from these data licensing agreements. Additionally, Google has expanded its partnership with Reddit, granting the search giant increased access to Reddit’s data to enhance AI model training and improve its products.

On March 15, Reddit disclosed that the Federal Trade Commission (FTC) is conducting a nonpublic inquiry “centered on our sale, licensing, or sharing of user-generated content with third parties for AI model training.” Reddit stated that it was “not surprised by the FTC’s interest” in its data licensing practices related to AI and does not believe it has “committed any unfair or deceptive trade practices.”

Founded in 2005 by technology entrepreneurs Alexis Ohanian and Steve Huffman, who serves as the company’s CEO, Reddit saw existing stakeholders, including Huffman, sell a total of 6.7 million shares in the IPO. As a part of the IPO, Reddit offered some of its top moderators and active users, known as Redditors, an opportunity to purchase stock through a directed-share program. Similar programs have been utilized by companies like Airbnb, Doximity, and Rivian to reward their influential users and customers.

“I hope they believe in Reddit and support our mission,” Huffman told CNBC in a Thursday interview. “But the primary goal is to involve them in the deal, similar to any professional investor.” Redditors have shown skepticism towards the IPO, citing concerns about the company’s financials and its sometimes strained relationship with moderators. Huffman acknowledged this sentiment and recognized the controversial subreddit Wallstreetbets, which played a significant role in the rise of meme stocks like GameStop.

“That’s the wonderful thing about Reddit; users speak their minds candidly,” Huffman remarked. “However, it’s essential to remember that this candidness is expressed on Reddit, a platform they cherish as their online home.” OpenAI CEO Sam Altman is a significant shareholder of Reddit, alongside Tencent and Advance Magazine Publishers, the parent company of publishing behemoth Condé Nast. Altman’s stake in the company was valued at over $400 million prior to the stock’s trading debut. In 2014, Altman spearheaded a $50 million funding round for Reddit and served on its board from 2015 to 2022.

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