Social media platform Reddit just had its initial public offering (IPO).
Surprisingly, despite Reddit not having turned an annual profit since its 2005 launch, the IPO was quite a success.
Reddit Shares Closed at 48% Up Its Price on First Day of Trading; Lost 8.8% on Second Day
On Thursday (21 March), the social media platform Reddit IPO-ed.
Huh? IPO is simi?
For the sua kus among us, an IPO is when a company lists its shares on a stock exchange so that the general public may purchase their shares.
It’s why you’re always hearing your finance bros talk about the shares of different companies — Tesla shares and whatnot. And now, probably Reddit shares as well.
Reddit’s entry into the public markets has been delayed time and again — it had first confidentially filed for an IPO in December 2021, but the platform’s actual IPO was delayed after a stock rout caused by the Russia-Ukraine war and the Federal Reserve’s interest rate hike.
But now, the IPO is finally here. And it has done pretty well for its first day of trading.
The shares of the social media company opened at US$47 on the New York Stock Exchange on Thursday, after pricing at US$34 in the IPO, which is the top of Reddit’s indicated price range.
By the end of the first trading day, the shares closed at 48% up its price — at US$50.44. This puts the firm’s value at more than US$9 billion.
Quite a success lah, given that this is one of the biggest ever IPOs by a social media platform. I’m sure the parents of Reddit’s founders are proud.
However, the shares are now priced at approximately US$46, meaning that the price has since dropped. Specifically, by around 8.8%.
We can only wait to see where Reddit goes from here.
What Reddit’s Success on First Day of Trading Means
At this point, you might be thinking: Why was Reddit’s first day of trading so successful? Hardly anyone even uses Reddit these days — why buy Reddit’s shares?
Further, Reddit has not turned an annual profit since its launch in 2005 — who in their right mind would buy Reddit’s shares?
Well, apparently a lot of people would still buy Reddit’s shares. And here’s some possible reasons.
Earlier in February this year, Reddit had struck a data licensing deal with Google worth about US$60 million (S$80 million) a year. The deal entailed Reddit making its data available to Google to train the search engine’s artificial intelligence models.
We hope that Google’s AI models won’t learn the wrong things from the subreddits. Otherwise, Google’s AI models might be dropping slurs every two sentences soon.
As most of us know, the term “AI” seems to get just about any finance bro‘s eyes to light up. The data licensing deal could explain why investors were so adamant about purchasing Reddit shares — in a sense, you’re essentially purchasing the shares of a training ground for AI programmes. It sounds great.
Reddit had also emphasised on its AI data licensing deal as an area of growth for the platform during its IPO marketing roadshow.
No wonder everyone is buying Reddit’s shares lah.
So, what does Reddit’s success on its first day of trading mean?
Well, it seems that investors are willing to ignore losses because of potential growth — this is a trend that hasn’t been seen for at least three years, according to Assistant Professor Josh White of Vanderbilt University.
Notwithstanding Reddit’s successful IPO, analysts have surfaced certain pitfalls that could undermine Reddit’s success.
You see, a large part of it has to do with Reddit’s retail allocation.
With most other IPOs, retail investors are shut out — meaning that they aren’t able to purchase shares during the IPO. Retail investors can only purchase shares when the newly listed company starts trading.
Reddit, however, has decided against taking the conventional path. The platform decided to allow retail investors early access to the IPO.
Specifically, Reddit had offered some shares to retail investors through online brokerage platforms such as Robinhood, SoFi Morgan Stanley Wealth Management and Fidelity Brokerage Services.
If you don’t know what those are, these platforms function like Tiger Brokers — online trading platforms for retail investors to invest in global markets.
As part of Reddit’s plan to reward its users, Reddit also reserved 8% of the shares on offer for eligible users and moderators, certain board members, and other friends and family members of Reddit’s employees and directors.
With such a risky retail allocation, demand for Reddit’s shares could be dampened. Prices could also become more volatile, given that these “early buyers” are not under a lock-up period and could sell once the stock starts trading.
Essentially, it sounds like bad news lah.
Mr Alan Vaksman, founding partner at investment firm Launchbay Capital, added: “I don’t know one company which really benefits from allocating shares to their users.”
Of course, it also doesn’t help that Reddit, as we mentioned earlier, hasn’t turned any profits since its launch in 2005. Reddit isn’t quite as near to the success of its competitors, such as Meta Platforms’ Facebook and Elon Musk’s X, as it should be.
Further, the US Federal Trade Commission (FTC) is also looking into Reddit’s licensing of its data for AI models. After all, big technology firms selling user data is always a sensitive topic.
Perhaps the best way to look at the Reddit IPO is as Professor Reena Aggarwal, director of the Georgetown University Psaros Centre for Financial Markets and Policy, had described. Prof Aggarwal shared: “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.”