Reddit soars 48pc on debut as AI pitch gets warm reception

Reddit Inc. shares soared 48 per cent above their initial public offering price, as investors embraced the social media company’s vision of profiting from the growth of artificial intelligence.

The San Francisco-based company’s stock closed at $US50.44 each overnight Thursday in New York, a day after the company and some of its shareholders raised $US748 million ($1.14 billion) in an offering priced at the top of a marketed range.

Reddit’s IPO is the fourth largest on a US exchange in 2024, as the market for first-time share sales continues to rebound after two of the slowest years in a decade. The successful listing is set to fire the starting gun for tech companies whose offering plans have been on hold.

The AI revolution was at the centre of Reddit’s proposed value proposition to investors, as companies eye the record-setting rallies in stocks like chipmaker Nvidia Corp.

“Large language models need data,” Reddit chief operating officer Jennifer Wong told Bloomberg TV. She described the company’s 19 years worth of “human experience organised by topic, with moderation and relevance — that is incredibly important to building both a chat capability and the freshness of information. That is an area where we see opportunity.”

Two-year slog

Reddit’s more than two-year slog to listing reflects the ups and downs of the market, beginning with its initial confidential filing in 2021, when IPOs on US exchanges set an all-time record of $US339 billion, according to data compiled by Bloomberg. IPOs in the US have tumbled since then, reaching only $US26b last year, the data show.

The company’s shares jumped as much as 70 per cent on its first day. The closing price of $US50.44 each gives it a market value of $US8b based on the outstanding shares listed in its filings with the US Securities and Exchange Commission. Including stock options and restricted share units, Reddit’s fully diluted valuation is closer to $US9.5b, just shy of the $US10b figure it had achieved in a 2021 funding round.

Mandeep Singh, senior industry analyst for Bloomberg Technology, argued even before the pricing that the company could be worth as much as $US10b.

Reddit’s $US34 IPO price translated to a enterprise value-to-sales multiple between Meta Platforms’ eight times multiple, and the four times multiple of smaller digital ad peers like Snap and Pinterest, Singh told Bloomberg Radio on Thursday.

“You pay for growth, and for Reddit, which accelerated growth in the past six months, it just makes a strong case that it should be at a premium multiple,” Singh said.

Reddit’s IPO tops big listings in September by US technology companies Instacart, which raised $US660m, and Klaviyo, with a $US659m offering. While those IPOs, along with British chip designer Arm Holdings’ $US5.23b offering — 2023’s biggest — failed to launch a listings rush, the market has warmed since then.

About $US8.8b has been raised this year via IPOs on US exchanges, the data show. That’s an increase of around 152 per cent at this point last year.

The strong showings by Reddit and Astera provide a market temperature check for other IPO candidates such as Microsoft-backed data security startup Rubrik and health-care payments company Waystar Technologies.

The IPO was led by Morgan Stanley, Goldman Sachs Group, JPMorgan Chase & Co. and Bank of America, according to Reddit’s filings. Reddit’s shares are trading the New York Stock Exchange under the symbol RDDT.

AI licensing

Like Astera, much of the investor enthusiasm for Reddit can be attributed to its business related to AI.

Reddit said it’s in the early stages of allowing third parties to license access to data on the platform, including to train artificial intelligence models. The company said that in January it entered into data licensing arrangements with an aggregate contract value of $US203m and terms ranging from two to three years. It expects a minimum of $US66.4m of revenue from those agreements this year, according to the filings.

Reddit also has announced a deal with Alphabet’s Google, allowing Google’s AI products to use Reddit data to improve their technology. Large language models often need vast troves of human-generated content to improve.

Original human thoughts and ideas are set to become more valuable as content becomes increasingly generated by AI, Wong told Bloomberg TV.

“If you think about it, a new car comes out — who is going to review it?,” she said. “A real-life family of six can tell you what it is like to drive that car. That is always going to be valuable.”

The listing follows the $US713m Astera Labs offering by one day. Astera, a semiconductor connectivity company focused on AI, priced its shares Tuesday above its marketed range and has increased 78 per cent since then.

Losses shrinking

Founded in 2005, Reddit averaged 73.1 million daily active unique visitors in the fourth quarter, according to its filings. The company reported a net loss of $US91m on revenue of $US804m in 2023, compared with a net loss of about $US159m on revenue of $US667m a year earlier.

About 8 per cent of the 22 million shares sold in the IPO were reserved for Reddit users and moderators who created accounts before January 1, as well as some board members and friends and family of some employees and directors. Those shares aren’t subject to a lockup, meaning the owners can sell them on the opening day of trading, according to Reddit’s filings.

Reddit’s largest shareholder is Advance Magazine Publishers, part of the Newhouse family publishing empire that owns Conde Nast, which bought Reddit in 2006 and spun it out in 2011.

Reddit co-founder and chief executive Steve Huffman said the company has many opportunities to grow both the platform and the business, according to a signed letter included in the filings.

“Advertising is our first business, and advertisers of all sizes have discovered that Reddit is a great place to find high-intent customers that they aren’t able to reach elsewhere,” Huffman said. “Advertising on Reddit is rapidly evolving, and we are still in the early phases of growing this business.”

Huffman’s shares give him 3.3 per cent of the voting power after the offering, the filings show. That includes Class B shares that will have 10 votes each compared with one each for the Class A shares sold in the IPO, the filings show. Huffman also has a voting proxy agreement with Advance.

Other large shareholders include Wong, as well as FMR and entities affiliated with OpenAI chief executive Sam Altman, Tencent Holdings, Vy Capital and Quiet Capital and Tacit Capital, according to the filings.

In all, Huffman and those investors hold about three-quarters of the shareholder voting rights.

Huffman’s fellow co-founder, venture capitalist Alexis Ohanian, isn’t listed among the investors with stakes of 5 per cent or more and isn’t named elsewhere in the filings.

Bloomberg