Reddit, the social forum behemoth, concluded its debut trading day with shares closing at $50.31, marking an impressive surge of almost 48% from its initial public offering (IPO) price of $34 per share. Prior to its public-market debut, the company had set a target range of $31 to $34 per share, eventually opting for the upper end of this spectrum. While prices initially experienced volatility, they have since stabilized, albeit slightly below the $50 mark.
Despite generating $804.0 million in revenue in 2023, Reddit remains unprofitable, reporting net losses exceeding $90 million last year. This financial situation might suggest that Reddit’s valuation is at the higher end of its revenue multiple when compared to similar social media firms like Snap. However, Reddit possesses a compelling AI narrative that could capture investors’ interest in its future prospects. Earlier this year, Reddit secured contracts totaling $203 million from AI companies seeking access to its data. Given Reddit’s extensive reservoir of the precise type of training data coveted by AI companies heavily reliant on large language models, this segment holds promise as a significant growth avenue for its future endeavors.
It’s important to highlight that the Federal Trade Commission (FTC) has initiated an inquiry into Reddit’s intention to license its user data for AI model training purposes. While investor enthusiasm may be ignited by the company’s AI strategy, it remains to be seen how Reddit’s stock will fare amidst the ongoing investigation. The outcome of this probe will likely influence investor sentiment and could have implications for the company’s future performance in the market.
Tech Secures Another Win
Reddit’s robust IPO launch, closely following Astera’s successful public offering, has the potential to disrupt the prevailing market dynamics and narrative surrounding initial public offerings. With a decline in tech valuations since the burst of the 2021-era asset bubble, few tech firms have ventured into the public markets. This trend can be attributed, in part, to discrepancies in valuations between the private and public sectors, among other factors.
However, with the initial two tech IPOs of the year demonstrating strong performance, the argument favoring a wait-and-see approach for healthy private-market tech firms holds less sway. While some companies may delay their IPO plans in anticipation of interest rate cuts in the latter part of the year, the successful debuts of Astera and Reddit suggest that the market is receptive to tech companies that exhibit growth, and potentially profitability on a quarterly or yearly basis, and incorporate AI into their prospectus.
While early trading successes can be promising, they don’t always guarantee a smooth journey in the public market. Many tech IPOs from the 2021 era have seen their values decline since their initial hot debuts. Nonetheless, upward-trending charts are generally viewed as more positive indicators.
If the recent string of successful IPOs prompts more tech companies on the sidelines to enter the market, including both well-known candidates like Turo with public filings and those like Circle with private filings, as well as companies that are sufficiently mature to go public, venture investors who didn’t invest in Astera or Reddit may find reason to commend their performance.
Will the IPO window genuinely open?
If the IPO opens under current market conditions, there’s reason to anticipate that the situation will persist, or potentially improve, as the year progresses. The Nasdaq Composite reached a new 52-week high today, surpassing its peak from 2021. This indicates that tech shares are currently valued at their highest levels, at least by one measure.
Secondary investors recently expressed uncertainty to TechCrunch regarding whether a successful Reddit IPO alone would revitalize the IPO market in 2024. However, with Astera Labs’ notable performance yesterday and Reddit’s strong showing today, there may indeed be more vigor in the IPO market this year than initially anticipated.
One can only hope.
