(Reuters) - Social media platform Reddit (RDDT.N)
shares ended their first day of trading in New York up 48%, signaling that investor appetite for initial public offerings of promising yet loss-making companies could be returning.
Reddit, which has not turned an annual profit since launching in 2005, lured investors by positioning its content as training grounds for artificial intelligence (AI) programs. Reuters reported last month that Reddit struck a data licensing deal with Google worth about $60 million a year.
While Reddit still relies on advertising for the vast majority of its revenue, it touted AI in its IPO marketing roadshow as an area of growth. It also disclosed last week that the U.S. Federal Trade Commission is looking into its AI data licensing deals.
"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.
Shares of the San Francisco-based company opened at $47 on the New York Stock Exchange on Thursday after pricing at $34 in the IPO, the top of the company's indicated price range. They ended trading at $50.44.
The IPO valued Reddit at $6.4 billion, and the company and its selling shareholders raised $748 million. Reddit was valued at $10 billion in a private fundraising round in 2021, and the strong stock market reception indicated that the company may not have needed to curb its valuation expectations so much to get the IPO off the ground.
Reddit's entry into public markets has been a long time coming. It confidentially filed for an IPO in December 2021, but a stock rout caused by Russia's war in Ukraine and the Federal Reserve's hiking of interest rates froze much of the IPO market and pushed it to delay.
Josh White, assistant professor of finance at Vanderbilt University, said Reddit's IPO showed investors were willing to ignore the company's losses because of its potential 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," White said.
RISKY RETAIL ALLOCATION
Reddit's popularity rose to new heights during the "meme-stock" saga of 2021 in which a group of retail investors collaborated on its forum "wallstreetbets" to buy shares of highly shorted companies like GameStop.
As part of its plan to reward users, Reddit has reserved 8% of the shares on offer for eligible users and moderators, certain board members, as well as friends and family members of employees and directors.
[1/6]CEO of Reddit Steve Huffman reacts at the New York Stock Exchange (NYSE) to celebrate the company's initial public offering (IPO) in New York City, U.S., March 21, 2024. REUTERS/Brendan McDermid Purchase Licensing Rights
It also offered some shares to retail investors through online brokerage platforms Robinhood (HOOD.O), SoFi (SOFI.O) Morgan Stanley Wealth Management and Fidelity Brokerage Services.
But the move is fraught with risks, analysts have said. Typically shut out of bidding in an IPO, retail traders eager to gain exposure to a newly-listed company buy shares only when they start trading.
Allowing early access to the IPO could dampen some demand. Such buyers are also not under a lock-up period and could choose to sell when the stock starts trading, potentially increasing the price volatility.
"I don't know one company which really benefits from allocating shares to their users," said Alan Vaksman, founding partner at investment firm Launchbay Capital.
Stocktwits.com, the social media firm that analyses posts and message volumes on its platform related to a company's ticker symbol, showed retail sentiment for Reddit was "extremely bullish."
But the discussion on Reddit's "wallstreetbets" forum was more mixed, with some users saying they would short the stock after it starts trading.
CULTURAL PHENOMENON
After its launch in 2005, Reddit became one of the cornerstones of social media culture. Its iconic logo - featuring an alien with an orange background - is one of the most recognized symbols on the internet.
Its 100,000 online forums, dubbed "subreddits," allow conversations on topics ranging from "the sublime to the ridiculous, the trivial to the existential, the comic to the serious", according to co-founder and CEO Steve Huffman.
Huffman himself turned to one of the subreddits for help to quit drinking, he wrote in his letter. Former U.S. President Barack Obama also did an "AMA" ("ask me anything"), internet lingo for an interview, with the site's users in 2012.
But despite its cult-like status in the social media world, the company has failed to replicate the success of its bigger rivals Meta Platforms' (META.O) 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," said Reena Aggarwal, director of the Georgetown University Psaros Center for Financial Markets and Policy.
Social media platform Reddit's (RDDT.N) market debut on Thursday ended a more than two year-long wait but shifts the focus to how it will compare with the other publicly listed peers.
Despite its cult-like status, the company has failed to replicate the success of Meta Platforms' (META.O) Facebook and Elon Musk's X.
Here's how the 19-year-old company compares with the larger social media companies:
REVENUE
With just more than $800 million in annual revenue, Reddit is much smaller than peers. Most of the company's revenue comes from ads as its communities of users post and discuss everything from history to stocks and AI, making it a valuable platform for some advertisers.
Reddit recently struck a deal with Alphabet's (GOOGL.O) Google unit to license its data for training large language models -- the technology behind generative AI applications like Gemini.
VALUATION, IPO FUNDS RAISED
Reddit's IPO raised $748 million after it was priced at the top end of the $31 to $34 range, valuing the company at $6.4 billion.
That said, Reddit's IPO valuation is less than half of what X, then Twitter, and about one-fourth of what Snap (SNAP.N) had at their respective IPOs.
Facebook, rebranded as Meta in 2021, was valued at more than $100 billion in its IPO in 2012 in the biggest listing for a social media firm. Meta, also home to Instagram and WhatsApp, counts nearly half the world's population among its users.
USER NUMBERS
As a niche platform, Reddit caters to over 70 million daily active users, far lower than peers. The platform has more than 100,000 online forums.
Still, Reddit has some advantages. It has a relatively lower expenses profile and strong growth rates for its ads business.
Brokerage Bernstein said Reddit's revenue to full-time employees ratio is 50% lower than both Snapchat and Pinterest, and 80% lower than Meta, while the 25% revenue growth is "up near Meta and Amazon ads levels."
As Reddit's (RDDT.N) stock market value soared to almost $9 billion in its Wall Street debut on Thursday, commenters on the social media website's largest stock trading forums voiced skepticism about the outlook for the money-losing company's shares.
"Where can I buy puts?," asked user savage011, among the highly rated comments on Reddit's "wallstreetbets" forum after the company and its underwriters priced its initial public offering at the top of the targeted range of $31 to $34 per share on Wednesday, raising $748 million.
Buying put options give traders the right to sell a stock at a fixed price, making money if the stock's market price falls.
Reddit's stock surged 48% in its first session on Wall Street, closing at $50.44 a share.
Its stellar debut - in the works for over two years - is the latest sign of improvement in investors' appetite for IPOs after rising interest rates in 2022 turned investors risk averse.
Unusually, Reddit reserved 8% of the shares it was offering for users and moderators on its website, for certain board members, as well as friends and family members of its employees and directors. Courting retail investors, Reddit also shopped its IPO to clients of online brokerage Robinhood Markets (HOOD.O) and SoFi Technologies (SOFI.O).
But recent Reddit comment threads about the IPO have focused heavily on the site's lack of profitability since its launch in 2005.
"I ended up not taking part in the IPO. I don't know enough about its plans to actually make money to invest in it," commented user atdharris on Reddit's "stocks" forum, which boasts 6.6 million users.
Investors hoping to bet against Reddit's stock will get a chance early next week. Nasdaq plans to list options on Reddit starting Monday. Other options exchanges are likely to list contracts on Reddit at the same time or soon thereafter.
Reddit's popularity surged during the "meme-stock" saga of 2021, when self-deprecating amateur traders collaborated on wallstreetbets to drive a massive rally in the shares of GameStop (GME.N) and other struggling companies, leading to deep losses for hedge funds that had bet heavily against them by establishing short positions.
Over 15 million users are subscribed to wallstreetbets.
Other Reddit users on Thursday were critical of IPO investing in general, with many of Wall Street's high-profile stock market debuts underperforming the S&P 500 in recent years.