Reddit set for hotly anticipated debut after pricing IPO at top of range

Reddit app is seen on a smartphone in this illustration taken, July 13, 2021. REUTERS/Dado Ruvic/Illustration/File Photo

Social media platform Reddit geared up for its high-profile market debut on the New York Stock Exchange on Thursday, in a test of investor appetite for companies looking to go public this year.

The San Francisco, California-based company priced its initial public offering (IPO) at the top end of the $31 to $34 range. The IPO valued Reddit at $6.4 billion, while the company and its selling shareholders raised $748 million.

Reddit‘s long-awaited entry as a publicly traded company has been in the works for more than two years. It confidentially filed for an IPO in Dec. 2021, but the stock rout due to the Federal Reserve’s quantitative tightening led to a delay.

The eyeball-grabbing debut will be a major test of the IPO market, where investors are seeing some green shoots, thanks to increasing bets of a soft landing.

“If Reddit trades poorly, it will cast a shadow over the IPO market. Many companies will hit pause on their IPO initiatives,” said Julian Klymochko, CEO of alternative investment solutions firm Accelerate Financial Technologies.

Risky retail allocation

Reddit‘s popularity rose to new heights during the “meme-stock” saga of 2021 in which a group of retail investors collaborated on its forum “wallstreetbets” to buy shares of highly shorted companies like GameStop.

As part of its plan to reward its user base, Reddit has reserved 8% of the shares on offer for eligible users and moderators, certain board members, as well as friends and family members of its employees and directors.

It has also offered some shares to retail investors through online brokerage platforms Robinhood, SoFi Morgan Stanley Wealth Management and Fidelity Brokerage Services.

But the move is fraught with risks, analysts have said. Typically shut out of bidding in an IPO, retail traders eager to gain exposure to a newly listed company buy shares only when they start trading, which could lead to a first-day pop.

Allowing early access to the IPO could dampen some demand. Such buyers are also not under a lock-up period and could choose to sell when the stock starts trading, potentially increasing the price volatility.

“I don’t know one company which really benefits from allocating shares to their users,” said Alan Vaksman, founding partner at investment firm Launchbay Capital.

Stocktwits.com, the social media firm that analyses posts and message volumes on its platform related to a company’s ticker symbol, showed retail sentiment for Reddit was “extremely bullish”.

But the discussion on Reddit‘s “wallstreetbets” forum was more mixed, with some users saying they would short the stock after it starts trading.

Cultural phenomenon

After its launch in 2005, Reddit became one of the cornerstones of social media culture. Its iconic logo – featuring an alien with an orange background – is one of the most recognized symbols on the internet.

Its 100,000 online forums, dubbed “subreddits”, allow conversations on topics ranging from “the sublime to the ridiculous, the trivial to the existential, the comic to the serious”, according to co-founder and CEO Steve Huffman.

Huffman himself turned to one of the subreddits for help to quit drinking, he wrote in his letter. Former U.S. President Barack Obama also did an “AMA” (“ask me anything”), internet lingo for an interview, with the site’s users in 2012.

The frenzy for technology stocks might help Reddit get a good start, said Josh White, assistant professor of finance at Vanderbilt University.

“We don’t get many large tech IPOs. Those tend to be very popular because it’s hard to buy that kind of growth,” White said.

But despite its cult-like status in the social media world, the company has failed to replicate the success of its bigger rivals Meta Platforms’ Facebook and Elon Musk’s X.

The company has said it was “in the early stages of monetizing (its) business” and is yet to turn an annual profit. Analysts said investors will be scrutinizing its roadmap to profitability.

“The real news is going to be after the first earnings call – where are they headed, what are the results looking like, what changes are they going to make,” said Reena Aggarwal, director of the Georgetown University Psaros Center for Financial Markets and Policy.