By Eric J. Savitz
It sure was an impressive start of trading for Reddit. And for that, you can thank artificial intelligence. Again.
The online discussion site went public on Thursday with an offering of 22 million shares at $34 each, including 15.3 million new shares. The rest were sold by existing shareholders.
The stock opened for trading at $47 and finished the first day of trading at just over $50, for a gain of 48% relative to the IPO price. On a fully diluted basis, that gives Reddit a valuation of about $9.6 billion, or about 10 times the roughly $1 billion in revenue the company is likely to report for 2024.
That is still less than the $15 billion valuation the company once reached in the private market.
Reddit posed a test of the stock market's appetite for IPOs, and its impressive debut should crack open the window for offerings a little further. The stock immediately jumped to a premium to more established social media plays.
Snap trades for about three times the sales expected for the current year, while Pinterest sells for about six times. Reddit is closer to Meta Platforms, the parent of Facebook and Instagram, at about nine times.
This IPO was co-managed by bankers at Morgan Stanley, Goldman Sachs, J.P. Morgan and BofA Securities. There is no doubt they are all sporting ear-to-ear grins.
A flurry of IPOs last fall, for Arm Holdings, Instacart, and Klaviyo, failed to spur any improvement in the market for new offerings. Reddit's strong reception may provide a better catalyst.
Reddit operates as a sort of old-school digital bulletin board that covers every imaginable topic. "Reddit is where people come to explore their interests, learn, express themselves, create and understand other people's experiences and perspectives," the company said in its IPO filing.
Reddit hasn't been a huge grower in recent quarters: In 2023, revenue increased a solid but not spectacular 21%. But there are opportunities emerging for Reddit that appear to have the Street expecting better growth from here. Here is where AI comes in.
Reddit CFO Drew Vollero told Barron's in an interview on Thursday that the company has three primary ways to make money. Only one of those is really reflected in its reported financial results.
The first and earliest business line, accounting for almost all historical revenue at the company, is advertising. On that score, Vollero contends that the company addresses "a differentiated consumer base" that other social-media platforms aren't reaching. "People see lots of runway for us in advertising both domestically and internationally," Vollero said.
A more nascent business model for Reddit is licensing its vast library of posts for training large language models. He said that Reddit has agreements in place with Google and some other smaller companies that together should generate over $200 million in revenue over the next three years combined, or about $66 million a year. None of that money was included in Reddit's 2023 financial results, he said.
A third opportunity, an area where Reddit has yet to roll out a product, is what Vollero calls "the user economy." The idea is to make it possible for people to earn a living from Reddit, either through selling goods or providing services. He said some people are already making money from the site by selling used watches, photoshopping images for clients, or selling software for games that can be played on Reddit. But he said the company hasn't started pursuing the user economy in a formal way.
Several weeks ago, NewStreet Research analyst Dan Salmon picked up coverage of the stock. He has now updated his analysis, setting a $54 price target on Reddit shares. Salmon is particularly bullish on the company's opportunity to license its data. He sees revenue rising 44% to $1.16 billion, with a further 34% jump to $1.55 billion in 2025.
The largest single investor in Reddit is Advance Magazine Publishers, a company controlled by the Newhouse family, which owns Condé Nast, American City Business Journals, and other media properties. Condé Nast acquired Reddit for $10 million in 2006, and spun it back out to the company's management team in 2011, maintaining a large stake. Advance owns a 26.5% stake in Reddit following the IPO.
OpenAI CEO Sam Altman holds a 7.6% stake in the company. Other large investors include Fidelity, with 7.4%; the venture funds Quiet Capital and Tacit Capital, both tied to the investor and former NFL football player Ben Mahdavi, with 6.0%; the Chinese internet company Tencent, with 9.7%; and Vy Capital, an investor firm formed by Alexander Tamas, a former partner of the Russian-born billionaire investor Yuri Milner, with a 4.5% stake. Founder and CEO Steve Huffman has a 3.2% stake.
Note that 82% of the company's shares outstanding are subject to a lockup period that expires on the third day after the company reports its June quarter earnings, or 180 days after the IPO, whichever comes first. In short, at some point there are going to be a lot more Reddit shares available to trade.
Write to Eric J. Savitz at eric.savitz@barrons.com
This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.
(END) Dow Jones Newswires
March 22, 2024 08:59 ET (12:59 GMT)
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