Does Reddit's Successful Public Debut Mean Tech IPOs are Back?

Key Points

• Despite skepticism regarding the company's valuation, Reddit made its debut on the New York Stock Exchange under the ticker symbol RDDT.
• The stock, which began trading at $34, closed the March 21 session at $50.44, an increase of 48%.
• With interest rates expected to be slashed this year, Wall Street's appetite for tech IPOs may be back. 

Despite skepticism about the company's valuation, social media Website and app Reddit Inc. debuted on the New York Stock Exchange under the ticker symbol RDDT.

The stock finished the March 21 session at $50.44, an increase of 48% over the pricing of $34, which was already at the high end of the company's announced range of $31 to $34.

The company and other stock owners who parted shares raised about $750 from the initial public offering. The company netted about $519 from the IPO. Reddit's market capitalization after day one of trading stood near $8.19 billion.

The IPO was oversubscribed, meaning there was plenty of interest. The stock now has 24.5 million shares in float. 

Tech was Ready for Successful IPO

Tech IPOs have been in the doldrums since 2021. Higher interest rates and the downward market action in 2022 were largely responsible for the paucity of new offers. 

Reddit, which launched 19 years ago, hosts thousands of chat rooms geared toward specific interests. One that investors and traders may be familiar with is WallStreetBets, which made famous meme stocks like AMC Entertainment Holdings Inc. NYSE: AMC and Rivian Automotive Inc. NASDAQ: RIVN. 

In pre-IPO regulatory filings, the company said its revenue for 2023 was $804 million, growth of 21% over 2022. The gross margin in 2023 was 86%. 

The company had a net loss of $90.8 million in 2023, narrower than 2022's loss of $158.6 million. That's an attractive feature for institutional investors who want to see a company achieve profitability in a reasonable period of time. 

Integrating Ads With User Content

Reddit plans to take a page out of the books of social media companies like X (formerly Twitter) and Meta Platforms Inc. NASDAQ: META by leveraging ads in user feeds that blend in with user-generated content. 

Reddit has also had the advantage of free community moderators, saving money on administrative costs. 

As part of the public offering, Reddit allowed several long-time moderators and users to purchase stock through a directed-share program. That's a tactic that's been used in other public debuts as a way of rewarding top customers and highly engaged users. 

In some ways, the Reddit IPO is a test for further IPOs among technology stocks. More recent infotech IPOs, such as Instacart, whose corporate name is Maplebear Inc. NASDAQ: CART and Klaviyo Inc. NYSE: KVYO, were deemed disappointments, although that doesn't mean those stocks are destined to be long-term laggards.

Astera Labs' Big IPO Gains

It's not a consumer-facing stock, so it's not as well known, but data center hardware specialist Astera Labs Inc. NASDAQ: ALAB went public on March 20 and rallied 72% above its IPO pricing. 

It probably helped that the Federal Reserve said it would follow through on its vow to cut interest rates three times in 2024. Tech stocks benefit when rates decline, as lower rates reduce borrowing costs. That's crucial for capital-intensive industries or companies whose expenses still outpace revenue, which is common among startups.

Additionally, tech companies often rely heavily on future earnings, making them more attractive in low-rate environments.

In its prospectus, Reddit cited four key growth areas:

• Advertising: By 2027, the company estimates its total addressable market globally from advertising, excluding China and Russia, to be $1.4 trillion. Its market opportunity is based on the digital advertising market and consists of desktop and mobile Web, display, video, and social direct response ads, in addition to search advertising. 
• Data Licensing: The company sees an emerging opportunity in data licensing. "We believe the importance of data to all types of analytics and AI, from training to testing and refining models, positions us well to tap into this strong market," the company said. It recently entered into "certain data licensing arrangements with an aggregate contract value of $203 million and terms ranging from two to three years," according to the prospectus.
• User Economy: "As we introduce new ways to enable developers to add additional functionality to their communities, we believe there will be further development of economic features on Reddit (e.g., games)," Reddit said.