Vuk Vuković on Reddit’s IPO: Even Facebook Didn’t Earn Much Before Its IPO

The popular social platform Reddit went public on Thursday, finishing its first day of trading in New York with a 48 percent increase in stock value, indicating that investor appetite for initial public offerings (IPOs) of promising but loss-making companies may be returning.

Although the platform had as many as 73 million users in December last year, the reality is that it has not achieved annual profit since its inception in 2005. Nevertheless, Reddit has managed to attract investors by positioning its content as a testing ground for artificial intelligence (AI) programs. Reuters reported last month that Reddit signed a data licensing agreement with Google worth about $60 million annually.

It is assumed that Google will use the data, specifically conversations from Reddit, to improve its language AI models. Existing ones, and perhaps those that will emerge.

– Such companies go public because they need some liquidity. They go for what is called a raise, which their investors almost certainly seek as a good exit from the investment. Most of these companies have grown based on venture capital or angel investors, and there is always pressure to develop and prepare them for an IPO, after which investors can cash in on the initial investment. The company gets the necessary liquidity, and this is mostly related to expansion – explained Vuk Vuković, a leading domestic macroeconomist and co-founder of Oraclum Capital LLC based in New York, to Lider.

Going public is also beneficial if a company wants to raise its credibility, he added. When a company goes public, its financial reports become public, and thus the story becomes more serious as the most important data is always available to the public, i.e., investors and shareholders. Although some companies never decide to go public, this is an example of ‘positive pressure from investors,’ Vuković believes.

– The same story was with Facebook. Many wondered if it had a good business model to manage when it went public. Facebook did not earn much before its IPO, but later they monetized it well, and the critics were wrong. Since then, it has achieved fantastic results. Whether Reddit’s model will be equally successful, we do not know. I doubt it will grow as much as Meta, but I think it is a good story – he added.

Although Reddit still relies on advertising for the vast majority of its revenue, he cited artificial intelligence as a potential growth area as it prepared for its IPO. Shares of the San Francisco-based company opened at $47 on the New York Stock Exchange on Thursday after being priced at $34 in the IPO, which is the company’s highest price range. They ended trading at $50.44.

User Rewards

The IPO valued Reddit at $6.4 billion, and the company and its selling shareholders raised $748 million. Reddit was valued at ten billion dollars in a private fundraising round in 2021, and the strong reception on the stock market showed that the company may not have had to temper its expectations in the valuation to launch the IPO.

It is worth noting that Reddit’s IPO has been awaited for quite some time. The IPO application was submitted back in December 2021, but the drop in stocks caused by the Russian war in Ukraine and the Federal Reserve’s interest rate hikes froze a large part of the IPO market and slowed Reddit’s plans.

Josh White, an associate professor in the Department of Finance at Vanderbilt University, told Reuters that Reddit’s IPO showed that investors are willing to overlook the company’s losses due to its potential growth. Such a trend has not been seen for at least three years.

– We do not have many large tech IPOs. They are usually very popular because it is hard to buy such growth – White said.

As part of its user reward plan, Reddit reserved eight percent of the shares in the offering for qualified users and moderators, certain board members, as well as friends and family members of employees and directors. It also offered some shares to small investors through online brokerage platforms Robinhood, SoFi, Morgan Stanley Wealth Management, and Fidelity Brokerage Services.

But this move is fraught with risks, analysts believe. Typically excluded from competing in IPOs, retail traders eager for exposure to a newly listed company buy shares only when they begin trading. Allowing early access to the IPO could reduce demand. Such buyers are also not under a lock-up period and could decide to sell when the shares begin trading, potentially increasing price volatility.

– I do not know of any company that really benefits from allocating shares to its users – said Alan Vaksman, founder of the investment firm Launchbay Capital.