March 21 (Reuters) - Social media platform Reddit's shares ended their first day of trading in New York up 48%, signaling that investor appetite for initial public offerings of promising yet loss-making companies could be returning.
Reddit, which has not turned an annual profit since launching in 2005, lured investors by positioning its content as training grounds for artificial intelligence (AI) programs. Reuters reported last month that Reddit struck a data licensing deal with Google worth about $60 million a year.
While Reddit still relies on advertising for the vast majority of its revenue, it touted AI in its IPO marketing roadshow as an area of growth. It also disclosed last week that the U.S. Federal Trade Commission is looking into its AI data licensing deals.
"At the core we are a growth company. Achieving our mission means that we want to grow users and community," said Jen Wong, Chief Operations Officer at Reddit.
Shares of the San Francisco-based company opened at $47 on the New York Stock Exchange on Thursday after pricing at $34 in the IPO, the top of the company's indicated price range. They ended trading at $50.44.
The IPO valued Reddit at $6.4 billion, and the company and its selling shareholders raised $748 million. Reddit was valued at $10 billion in a private fundraising round in 2021, and the strong stock market reception indicated that the company may not have needed to curb its valuation expectations so much to get the IPO off the ground.
Reddit's entry into public markets has been a long time coming. It confidentially filed for an IPO in December 2021, but a stock rout caused by Russia's war in Ukraine and the Federal Reserve's hiking of interest rates froze much of the IPO market and pushed it to delay.
Josh White, assistant professor of finance at Vanderbilt University, said Reddit's IPO showed investors were willing to ignore the company's losses because of its potential growth - a trend not seen for at least three years.
"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.
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 users, 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 employees and directors.
It 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.
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.
Reuters Graphics Reuters Graphics
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.
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 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.
