Shares
of
the
social
media
platform
Reddit
surged
in
their
stock
market
debut
Thursday,
a
sign
of
strong
investor
appetite
for
a
company
that
has
yet
to
profit
and
operates
in
a
highly
competitive
industry.
Reddit
shares
opened
at
$47
on
their
first
day
of
trading
under
the
RDDT
ticker
on
the
New
York
Stock
Exchange,
well
above
the
$34
public
offering
price
set
on
Wednesday.
The
stock
climbed
as
high
as
$57.80
in
afternoon
trading
before
closing
at
$50.44,
a
jump
of
48%
from
the
IPO
price.
That
strong
performance
signals
that
Reddit’s
plan
to
expand
its
nascent
advertising
business
and
diversify
its
revenue
sources
by
licensing
its
content
to
third
parties
has
struck
a
chord
with
investors.
The
company’s
cash
flows
are
improving,
and
it
generated
buzz
by
reserving
some
shares
at
its
IPO
price
for
users.
However,
investors
will
own
shares
of
a
company
without
a
full
year
of
profitability.
Reddit
also
faces
stiff
competition
for
digital
ad
dollars
from
established
firms
many
times
its
size,
including
Alphabet (GOOGL) and
Meta
Platforms (META),
a
giant
in
the
social-media
landscape.
The
site
is
also
no
stranger
to
controversy,
most
recently
over
its
2023
decision
to
charge
third-party
developers
for
access
to
its
API.
As
interest
rates
have
climbed
over
the
past
few
years,
investors
have
soured
on
paying
premiums
for
companies
with
no
clear
path
to
profitability,
according
to
Nick
Smith,
senior
research
analyst
at
Renaissance
Capital.
“In
that
sense,”
he
says,
“Reddit
will
certainly
be
one
to
watch”.
Reddit
IPO
Valuation
Reddit’s
$34
IPO
price
valued
the
company
at
about
$6.4
billion
–
significantly
less
than
the
$10
billion
price
tag
it
carried
in
2021,
according
to
PitchBook
data.
That
fundraising
round
was
led
by
Fidelity
Investments,
whose
Blue
Chip
Growth
fund
now
holds
roughly
$17
million
worth
of
Reddit
shares
(a
0.032%
weight
in
its
portfolio).
The
company
closed
with
a
market
capitalisation
of
roughly
$8
billion
on
Thursday,
significantly
closer
to
its
2021
valuation.
This
is
the
first
major
social-media
IPO
since
Pinterest (PINS) debuted
in
2019.
Reddit
Still
Unprofitable
Despite
Growing
Revenue
While
the
company’s
cash
flow
is
improving,
Reddit
has
yet
to
see
an
annual
profit.
The
firm
reported
a
net
loss
of
$90.8
million
in
the
2023
calendar
year
on
revenue
of
$804
million,
compared
with
a
$158.5
million
loss
on
$666.7
million
in
revenue
in
2022.
The
company
acknowledges
that
it
is
in
the
“early
stages”
of
monetizing
its
platform.
The
vast
majority
of
Reddit’s
revenue
comes
from
advertising.
Some
98%
of
its
cash
flow
was
from
third-party
advertising
on
the
platform
in
2022
and
2023.
Much
of
that
advertising
comes
from
a
small
core
group
of
customers.
The
company’s
plans
to
diversify
its
revenue
streams
include
licensing
its
vast
pool
of
user
data
to
third
parties
for
various
purposes,
including
research
and
training
artificial
intelligence
models.
Analysts
say
this
could
draw
attention
from
investors,
especially
given
the
connection
to
the
AI
theme,
which
has
propelled
markets
higher
this
year.
Social
Media
Stocks
Face
Competitive
Landscape
This
comes
after
a
series
of
buzzy
listings
–
Arm
Holdings (ARM),
Instacart
(Maplebear) (CART),
Klaviyo (KVYO),
and
Birkenstock (BIRK)
–
failed
to
ignite
the
IPO
market
last
fall.
With
stocks
fresh
off
a
major
rally
to
start
the
year
and
the
interest-rate
landscape
looking
more
certain,
investors
wonder
whether
Reddit’s
debut
will
open
the
floodgates
for
new
listings
in
2024.
Analysts
say
Snap (SNAP) and
Pinterest
will
be
Reddit’s
closest
competitors
in
public
markets.
Both
stocks
have
struggled
since
the
beginning
of
the
year,
with
Snap
down
nearly
30%
since
January
and
Pinterest
down
7.3%,
while
tech
titans
like
Meta
and
Alphabet
have
soared.
Snap
and
Pinterest
carry
market
capitalisations
of
$19.5
billion
and
$23.7
billion,
respectively.
Michael
Hodel,
Morningstar’s
director
of
communication-services
equity
research,
recently
pointed
out
that
Snap
could
struggle
to
pull
in
ad
dollars.
“We
believe
wide-moat
firms
such
as
Meta
and
Alphabet,
which
have
proved
the
value
of
their
ad
inventories
to
advertisers
over
the
years
and
together
dominate
the
market,
will
probably
continue
to
take
more
digital
ad
dollars
over
time,”
he
wrote.
Reddit
may
see
the
same
challenges,
especially
with
advertising
budgets
still
recovering.
“We
face
significant
competition
across
many
areas
of
our
business,”
the
company’s
IPO
filing
reads.
“We
compete
directly
with
all
other
major
advertising
platforms,
as
well
as
publishers
including
Google,
Meta,
Snapchat,
TikTok,
Pinterest,
and
X.”
Social
Media
Stock
Performance
Source:
Morningstar
Direct,
Morningstar
Indexes,
March
11,
2024
Is
Reddit
Stock
Expensive?
Compared
with
2021,
Smith
says
investors
are
“more
discerning
in
how
much
they’re
willing
to
pay
for
certain
levels
of
growth
and
profitability
…
they’re
just
not
willing
to
pay
the
sky-high
valuations
that
they
were
in
2020
and
2021”.
But
that
doesn’t
mean
investors
won’t
stomach
a
price
in
Reddit’s
target
range.
He
points
to
solid
growth
in
user
numbers
and
revenue
as
potential
green
flags.
And
if
investors
are
willing
to
take
a
chance
on
Reddit
with
the
market
climbing
and
lower
rates
on
the
horizon,
it
could
set
the
stage
for
more
listings
this
year.
“Other
companies
in
the
pipeline,
especially
in
the
tech
space,
will
be
looking
to
see
how
well
this
does
…
to
gauge
investor
sentiment,”
Smith
says.
Reddit
Users
Could
Make
Stock
More
Volatile
Reddit
made
headlines
after
announcing
that
a
small
portion
of
its
IPO
shares
would
be
reserved
for
users,
and
the
listing
also
commanded
attention
because
of
the
role
Reddit’s
WallStreetBets
community
played
in
the
meme
stock
frenzy
of
2021.
In
its
filing,
Reddit
laid
out
various
risks
to
its
business
that
could
affect
the
performance
of
its
stock,
including
risks
related
to
its
user
base.
The
company
warned
that
high
interest
in
the
1.76
million
shares
it
will
set
aside
for
moderators
of
its
platform
could
artificially
inflate
prices
in
the
early
days
after
the
listing.
“Redditors’
participation
in
this
offering
could
result
in
increased
volatility
in
the
market
price
of
our
Class
A
common
stock,”
the
statement
reads.
Reddit
also
nodded
to
the
outsize
influence
that
its
users
had
on
the
prices
of
GameStop (GME),
AMC
Entertainment
Holdings (AMC),
and
other
meme
stocks
in
2021,
and
said
the
same
phenomenon
could
affect
its
shares,
resulting
in
heightened
volatility.
But
Smith
doesn’t
expect
a
small
subset
of
retail
investors
to
make
a
major
difference
in
Reddit’s
stock,
especially
since
the
bulk
of
the
shares
will
be
purchased
by
institutional
investors.
“It’s
a
little
bit
more
of
a
bark
than
a
bite,”
he
says.
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