Reddit Inc’s first-day jump fattened the wallets of the social media platform’s users who were given the unusual opportunity to buy shares at the initial public offering price as well as longtime investors benefiting from the rebound in the company’s valuation.
Touting its plan to profit from the growth of artificial intelligence, Reddit’s shares climbed 48% in its trading debut on Thursday after pricing at the top of a marketed range to raise $748mn in the fourth-largest US IPO of the year. The stock was lower by as much as 5% in premarket trading yesterday.
At the closing price of $50.44, San Francisco-based Reddit has a market value of $8bn. Including stock options and restricted share units, the company’s fully diluted valuation is closer to $9.5bn, based on filings with the US Securities and Exchange Commission. That’s about $3bn more than its valuation in Tuesday’s share sale and just shy of the $10bn figure it had achieved in a 2021 funding round.
The strong showing by Reddit, along with AI-focused semiconductor connectivity company Astera Labs Inc whose shares have gained 78% since its IPO on Tuesday, provides a promising market check for other IPO candidates such as Microsoft Corp.-backed data security startup Rubrik Inc and health-care payments company Waystar Technologies Inc.
“What we’re seeing today is Reddit reaping the benefits of being a first mover after a lengthy IPO drought,” said Saar Gur, a general partner at venture firm CRV, which isn’t an investor in Reddit.
“There’s value, regardless of how rock solid a company is, of being the first company out because you’re going to get a lot of attention and chatter about the market as a whole.”
The returns realised by Reddit’s stockholders will be a focal point for those deciding whether to pursue IPOs of their own.
Almost a third of the 22mn shares sold in the IPO were owned by Reddit’s executives and employees, who got a $228mn payday at the $34 IPO price. Chief Executive Officer Steve Huffman was set to sell 500,000 shares in the IPO while Chief Operating Officer Jennifer Wong planned to sell 514,000, according to the filings. With Thursday’s gains, Huffman and Wong’s remaining personal stakes in the company surged to $210mn and $81mn, respectively.
Reddit’s most loyal users were able to buy 8% of the shares at the IPO price, an opportunity typically reserved for institutional investors, and saw a total return in the aggregate of about $29mn by day’s end.
The biggest winner was the Newhouse family, whose Advance Magazine Publishers Inc will continue to own about a quarter of Reddit. The family’s $10mn initial investment in the nascent social-media company in 2006 is now worth more than $2.1bn.
If Thursday’s gains hold, the big winners will include venture capital firms and other high-profile investors that took stakes before the company’s valuation first surged. Even investments in two high-priced financing rounds in 2021 — before the company’s value plunged — have now largely recovered from that dip.
At the $34 IPO price, investors such as affiliates of Tencent Holdings Ltd, Fidelity and OpenAI’s Sam Altman among others, as well as Advance Magazine Publishers, stood to lose about $286mn on those particular portions of their holdings, which were bought for $42.47 and $61.79 a share. Thursday’s gains cut the combined loss for those two rounds to $42mn, a shortfall likely offset by returns from earlier investments in Reddit at bargain prices. Other major Reddit investors include Vy Capital and Quiet Capital and Tacit Capital, according to the filings.
Reddit’s more than two-year slog to listing reflects the ups and downs of the market, beginning with its initial confidential filing in 2021, when IPOs on US exchanges set an all-time record of $339bn, according to data compiled by Bloomberg. IPOs in the US have tumbled since then, reaching only $26bn last year, the data show. Reddit’s listing pushes the total raised by IPOs via US exchanges this year to about $8.8bn. That’s an increase of around 152% at this point in 2023.
One benefit of Reddit’s slow route to the public market is that enthusiasm for the AI revolution has continued to mount. The potential of AI was at the centre of Reddit’s proposed value proposition to investors, as companies eye the record-setting rallies in stocks like chipmaker Nvidia Corp.
“Large language models need data,” Wong told Bloomberg TV. She described the company’s 19 years’ worth of “human experience organised by topic, with moderation and relevance — that is incredibly important to building both a chat capability and the freshness of information. That is an area where we see opportunity.”
While numerous comments on Reddit boards, known as subreddits, before the IPO featured sometimes profane comments about shorting its stock, some users posting Thursday acknowledged the value of Reddit for training AI models.
Mandeep Singh, senior industry analyst for Bloomberg Intelligence, argued even before the pricing that the company could be worth as much as $10bn. Reddit’s $34 IPO price translated to a enterprise value-to-sales multiple between Meta Platforms Inc’s eight-times multiple, and the four-times multiple of digital ad peers like Snap Inc and Pinterest Inc, Singh told Bloomberg Radio on Thursday.
“You pay for growth, and for Reddit, which accelerated growth in the past six months, it just makes a strong case that it should be at a premium multiple,” Singh said.
Reddit said it’s in the early stages of allowing third parties to license access to data on the platform, including to train artificial intelligence models.
The company said that in January it entered into data licensing arrangements with an aggregate contract value of $203mn and terms ranging from two to three years. It expects a minimum of $66.4mn of revenue from those agreements this year, according to the filings.
Reddit also has announced a deal with Alphabet Inc’s Google, allowing Google’s AI products to use Reddit data to improve their technology.