Reddit shares surged 48% on Thursday during their first day of trading, indicating investor enthusiasm that could pave the way for more tech companies to go public this year.
The social media company’s shares debuted on the New York Stock Exchange at $47, following an initial public offering price of $34 on Wednesday. The stock continued to climb, closing at $50.44. This increase valued Reddit at around $9.5 billion, slightly below its $10 billion valuation from three years ago in private markets.
Reddit, founded in San Francisco in 2005, is well-known for its message boards where users gather in subreddits to discuss various topics from parenting to power washing to Labrador retrievers. The company has faced challenges similar to other social media giants, such as content moderation and revenue generation.
“Becoming a public company has significantly improved us,” said Steve Huffman, Reddit’s CEO, in a Thursday morning interview. “We’re delivering better products at a faster pace.”
Reddit’s strong performance suggests a growing interest in tech offerings in the public markets, following a slowdown due to rising interest rates and economic uncertainty. In 2021, just over 100 companies went public in the U.S., a fraction of the number in 2020.
Reddit’s IPO success was not guaranteed, considering the company’s growth, lack of profitability, and questions about its advertising and data-licensing businesses.
The positive reception of Reddit’s IPO, along with other successful debuts like Astera Labs, could encourage more private tech companies like Rubrik, SeatGeek, and ServiceTitan to go public.
Tech companies considering an IPO must decide if they need to adjust their valuation expectations, especially after some private tech firms faced lower valuations post-IPO.
Large tech companies like Stripe, based in San Francisco, may delay going public to avoid moderating their valuation expectations. Stripe recently allowed employees to cash out shares without an IPO.
Reddit’s trading debut also tested whether it would become a “meme stock,” gaining a cult-like following on social media platforms for financial gain. WallStreetBets, a subreddit, plays a significant role in promoting meme stocks.
In its IPO, Reddit allocated up to 8% of shares to its users, a unique move to reward loyal users. On Thursday, Redditors actively discussed Reddit’s stock on WallStreetBets.
Financial institutions typically buy into an IPO the day before a company goes public, benefiting from retail investors’ interest the next day.
“It’s a way to cultivate loyalty,” said Jay Ritter, a finance professor at the University of Florida. “Companies aim to reward successful people.”
However, this approach also carries risks, as seen with Robinhood’s IPO performance in 2021.
The Newhouse family, major shareholders in Reddit, including Tencent and Sam Altman, were set to benefit significantly from the IPO.
Despite Reddit’s success, concerns remain among its 70 million daily users about how the site’s functionality could change due to quarterly reporting and Wall Street demands.
Mr. Huffman reassured users, saying, “We love Reddit and want to treat it with respect as we move forward.”
He added, “Actions speak louder than words, and we aim to demonstrate our commitment to Reddit.”
