The debut of Reddit’s IPO at the New York Stock Exchange was met with a positive response, marking a notable success in an otherwise sluggish IPO market. Despite a lackluster performance in previous years, Reddit’s entry into the public market was seen as encouraging, particularly given its substantial fundraising and valuation.
With Reddit raising $748 million and being valued at $6.4 billion, the company’s shares surged by 48% on the first day of trading, pushing its valuation even higher, closer to $10 billion. This performance sparked optimism among industry experts and observers, with some predicting that other traditional tech companies might follow suit and consider going public.
Josh White, an IPO expert and former economist at the Securities and Exchange Commission, noted that Reddit’s successful IPO could motivate other companies to explore similar paths, especially if Reddit’s share price remains stable or continues to rise.
Stephen Sikes, the COO of the retail investing platform Public.com, echoed this sentiment, expressing excitement about the resurgence of the IPO market. He suggested that debuts like Reddit’s could embolden more companies to pursue public offerings.
Overall, Reddit’s IPO was viewed as a positive development, potentially signaling a revitalization of the IPO market and inspiring confidence among companies considering similar moves.
An IPO market that went from doom to gloom to (maybe) boom
The IPO market experienced a notable slowdown in 2022 and 2023 following an initial frenzy at the onset of the pandemic. This trend culminated in the global IPO market’s slowest fourth quarter since 2012, according to data from S&P Global Market Intelligence.
Despite this, several high-profile IPOs in 2023, including those of U.K.-based Arm, Klaviyo, Instacart, and Cava, garnered attention, particularly because these companies were profitable—a departure from the trend seen in previous years. While Reddit itself has yet to achieve profitability, its increasing sales and decreasing losses, coupled with the success of Arm’s substantial $4.9 billion IPO late in 2023, suggest a potential spike in IPO activity through the middle of 2024.
However, Reddit’s influence alone isn’t sufficient to drive companies to pursue IPOs. Another significant factor is the Federal Reserve’s recent indication that it intends to reduce interest rates by three-quarters of a percentage point by the end of the year.
While this surge in IPO activity might slow down later in 2024, particularly as the presidential election gains momentum, Josh White predicts a “double-inverted U shape” in the IPO market. He anticipates a temporary pause in IPO activity in the latter half of the year, with the market potentially reopening next year.
White emphasizes the importance of several factors, including stability in the aftermath of the election, continued low inflation, and the Federal Reserve’s commitment to rate cuts, in sustaining the momentum of the IPO market. Overall, while there may be fluctuations, the general trend suggests a potential resurgence in IPO activity both in the near and medium-term future.
The return of classic tech
Investors have shown a robust interest in AI-related ventures; however, Reddit’s success in the social media realm could reignite enthusiasm for what’s termed “classic tech.” While AI plays a role in Reddit’s operations, Josh White suggests that the company could be more accurately labeled as “AI-adjacent” since its revenue primarily stems from advertisers. Unlike other platforms like Snap and X (formerly Twitter), which have faced challenges, Reddit has managed to bolster its sales significantly, experiencing a growth of over 20% in 2023, reaching $804 million.
White believes that the broader implication here is that investors are now placing value on growth that extends beyond being solely AI-driven. This suggests a shift in investor sentiment, recognizing the potential for growth and success in tech companies that aren’t exclusively focused on AI technology.
One cautionary note: Ameme-ing could maim investors
Indeed, there is a risk that Reddit may face challenges from its own users when its options begin trading. Redditors, particularly those on the infamous subreddit WallStreetBets, have already indicated their intention to short the stock. This presents a unique situation where the platform’s own community could potentially engage in trading behaviors that might impact Reddit’s stock performance. Such dynamics highlight the complexities and unique challenges that Reddit faces as a publicly traded company, particularly given the active and influential nature of its user base.