It seems that the long-awaited Reddit IPO is now finally going to happen. The company and its investors who will be selling shares in the offering first filed in 2021, a year in which Reddit did a round of fund raising that valued the company at around $10 billion. However, based on the stated price range for the offering, which is expected to happen next week under the ticker symbol RDDT, the fully diluted market valuation of Reddit will be around $6.4 billion.
I am not asking for sympathy for institutional investors and venture capitalists who will be taking a hit here, but their losses over the last three years should not necessarily dissuade anyone who is thinking of participating in the offering or buying RDDT shortly after the launch.
Most high profile IPOs, which this certainly is, follows a pattern on which I have commented before in other cases. The strong name recognition creates an illusion of desirability that leads to excess demand at the actual offering price, which in turn leads to a pop in the share price in early trading. Much of that is caused by so-called “fast money,” and when those traders and investors start to take quick profits, the stock drops. That drop is then exaggerated as people start to analyze the actual profitability and prospects of the company, and the stock falls below that initial offering price.
That is ably demonstrated by a look at the chart for the early days of Twitter stock, a comparison that many people are making right now.
However, there are a couple of major differences between the Twitter and Reddit IPOs. First, Reddit has set aside some shares for what have become known as “redditors,” a group of contributors and moderators who registered before the start of this year. That is seen by many people as being a negative as those shares are not restricted and can be sold immediately after the listing.
However, the allocation of stock to what are presumably the company’s biggest fans could potentially reduce the excess demand that usually causes such big pops in early trading, making RDDT less attractive to fast money than TWTR or other similar popular offerings were. If that turns out to be the case, then that will reduce the initial volatility to the upside, but will also reduce the chances of a big, almost panicky fall that would take the stock a lot lower in the months following the launch. It is likely, then, that RDDT will be more accurately valued by the market based on its profits and potential in its early trading.
Given that Reddit doesn’t make money, that may seem to be a negative at first glance, but there is one thing about social media that has changed dramatically since the IPO of Twitter and other companies in the space. There is now a plethora of companies that are developing or have already developed AI-based tools and platforms which has massively increased demand for the data on which those models are trained.
Data sales were always a factor in the revenue of social media companies, but advertising revenue was far more important. That will probably still be the case when Reddit starts to break down its revenue sources more accurately as a public company, but the current AI mania among investors and the AI training-friendly, discussive style of the Reddit platform could well lead to a sense of optimism about Reddit’s prospects that will support the stock for some time after the launch.
That isn’t to say that there aren’t risks if you are looking to buy RDDT when it starts trading. The market has been on a sustained “risk on” run for several months, taking the major indices to new highs, led largely by AI’s potential. But if this morning’s not great CPI data and the PPI numbers on Thursday shift the narrative away from rate cuts, sentiment could change quickly, leaving an inherently risky IPO to take place in a more “risk off” environment.
On balance, though, the AI factor should work in RDDT’s favor and allow it to defy the history of high profile IPOs in the tech and social media spaces. That is enough to make it a stock that may represent some value for longer term investors, a big difference from TWTR at its IPO.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
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Martin Tillier
Martin Tillier spent years working in the Foreign Exchange market, which required an in-depth understanding of both the world’s markets and psychology and techniques of traders. In 2002, Martin left the markets, moved to the U.S., and opened a successful wine store, but the lure of the financial world proved too strong, leading Martin to join a major firm as financial advisor.
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