Reddit, the popular social media platform known as the "front page of the internet," made a strong debut on the New York Stock Exchange (NYSE) on Thursday, with shares jumping 48% after the company priced its initial public offering (IPO) at the top of its expected range. The 19-year-old website, which hosts millions of online forums, raised approximately $750 million from the offering, with the company collecting about $519 million.
Trading under the ticker symbol "RDDT," Reddit's stock opened at $47 and reached a high of $57.80, giving the company a market cap of around $10.9 billion at its peak. However, shares later closed at $50.44, resulting in a market cap of about $9.5 billion. The IPO valued Reddit at approximately $6.5 billion, a significant discount from its private market valuation of $10 billion in 2021 during the height of the technology boom.
Reddit's IPO is being closely watched as a test of investor appetite for new tech stocks, particularly in the social media sector, following an extended dry spell for IPOs. The company's successful debut comes amid a challenging environment for startups, which have faced rising interest rates, soaring inflation, and a shift in focus from growth to profitability.
In its prospectus, Reddit reported a 20% increase in annual sales for 2023, reaching $804 million, up from $666.7 million in the previous year. The company narrowed its net loss to $90.8 million last year, an improvement from the $158.6 million loss recorded in 2022. Based on its revenue over the past four quarters, Reddit's market cap at IPO translated to a price-to-sales ratio of about 8, comparable to some of its competitors such as Alphabet, Meta, Pinterest, and Snap.
One of Reddit's key growth strategies is its focus on data licensing, which the company believes could become a major source of revenue. Reddit has entered into data licensing arrangements with an aggregate contract value of $203.0 million and terms ranging from two to three years. In 2024, the company plans to recognize roughly $66.4 million in revenue as part of these deals. Additionally, Reddit has expanded its partnership with Google, allowing the search giant to access more Reddit data to train AI models and improve its products.
However, Reddit's data licensing practices have drawn the attention of the Federal Trade Commission (FTC), which is conducting a non-public inquiry into the company's sale, licensing, or sharing of user-generated content with third parties for AI training purposes. While Reddit stated that it was not surprised by the FTC's interest and does not believe it has engaged in any unfair or deceptive trade practices, the inquiry highlights the regulatory scrutiny surrounding the use of user data in the AI industry.
As part of its IPO, Reddit offered some of its top moderators and users, known as Redditors, the opportunity to buy stock through a directed-share program, a move that CEO Steve Huffman described as a way to get them involved in the deal, similar to professional investors. However, some Redditors have expressed skepticism about the IPO, citing concerns about the company's financials and its sometimes troubled relationship with moderators.
Notable shareholders in Reddit include OpenAI CEO Sam Altman, whose stake in the company was worth over $400 million before the stock began trading, as well as Tencent and Advance Magazine Publishers, the parent company of publishing giant Condé Nast.
Looking ahead, Reddit's success as a public company will depend on its ability to monetize its growing user base, which has increased by approximately 40% between 2021 and 2023, and expand into new markets, particularly in countries where English is a primary language. However, the company faces challenges in balancing user growth with monetization efforts, as well as navigating the regulatory landscape surrounding data licensing and AI.
