The Reddit IPO will arguably go down as one of the most anticipated initial public offerings (IPOs) of 2024, and it did not disappoint. On Wednesday, March 20, the social media company priced its IPO at $34 per share, at the top end of its previous range of $31 to $34.
As for its market debut, RDDT shares opened at $47 on Thursday, March 21, hit an intraday high of $57.80, and settled the session at $50.44. This brought Reddit's market valuation to $8.0 billion.
The platform was founded in 2005 by University of Virginia roommates Steve Huffman and Alexis Ohanian, as well as Aaron Swartz. Reddit was sold to Condé Nast Publications a year later and then spun out in 2011.
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The company has grown by leaps and bounds over the past two decades. In Q4 2023, Reddit, which describes itself as "a community of communities, driven by interests and passions," averaged 73 million daily active unique users and 267 million weekly active unique users.
According to the regulatory filing, the company says that it is going public in order "to advance our mission, become a stronger company, and provide meaningful benefits to our community."
What is the Reddit IPO?
"An initial public offering enables a private company to 'go public,' or start trading in public markets, by issuing its own shares on a stock exchange for the first time. In this way, any investor can buy shares and the company can raise capital to grow," writes Kiplinger contributor Tom Taulli in his feature "What Is an Initial Public Offering (IPO)."
One difference between the Reddit IPO and more traditional public offerings is that employees of the social media company were allowed to sell their shares during the offering. Typically, company "insiders" such as the founders, managers and employees – and sometimes early investors – are restricted from selling their shares during what's known as a "lockup period" that generally lasts between 90 to 180 days.
The Reddit IPO focused on its users too. In addition to the company reserving 1.5 million Class A shares to help fund community-related programs that are important to its users, Reddit allowed a set amount of users the opportunity to buy IPO shares at the offering price via a directed share program. However, many users declined the offer, according to CNBC.
Should I buy Reddit stock?
Many high-profile tech insiders were early investors in the social media company. OpenAI CEO Sam Altman, for one, has invested at least $60 million in Reddit and controls 9.2% of voting power. Peter Thiel, who co-founded PayPal Holdings (PYPL) and Palantir Technologies (PLTR), as well as Chinese tech conglomerate Tencent Holdings (TCEHY), were also early investors.
Despite early backing from heavy hitters in the tech sector, retail investors may want to hold tight before rushing out to buy Reddit stock.
While IPO stocks tend to have strong first-day showings, returns for the first year are generally weak, says the team of analysts at Trivariate Research, a market research firm based in New York. And since 2020, "the average IPO has lagged its industry average by 30% over the subsequent three years following its first closing price."
Alan Vaksman, founding partner of Launchbay Capital, says it's positive that Reddit's opening price landed even higher than expected, but adds that it's important to watch how it goes over the next few weeks and months.
"Secondary market prices have shown to be an increasingly accurate gauge, and Reddit's last private valuation was around $5 billion, nearly half of what we're seeing it valued at now," Vaksman says. "This could mean great things for other social media companies considering their IPO if the price holds high enough, but only time will tell."
Vaksman also notes that where the company's valuation goes from here "will likely set the tone of how other social media companies will strategize their IPO plans this year, and while it's a tough one, I hope it maintains the profitability it's garnered with this initial public offering."
As for retail investors, whether or not you buy the Reddit IPO boils down to your own personal investing goals and risk tolerance. If you do decide to buy Reddit stock when it first begins trading, do so in a small amount that you can afford to lose.
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