Reddit shares continue to perform strongly in their Thursday IPO debut, currently trading at $47.57 with a staggering 40% increase since the opening price, reflecting a market capitalization of around $7.65 billion.

This marks the first major social media IPO since Pinterest’s 2019 offering, according to a report by CNBC published earlier today. The 19-year-old online community platform priced its IPO at $34 a share, at the higher end of the anticipated range. CNBC says shares initially surged as high as $57.80 before settling back. As of 3:05 PM EDT on March 21st, 2024, the stock maintains impressive momentum.

CNBC also mentions that Reddit is gauging investor interest in new tech stocks after a prolonged IPO slump. Since the 2021 tech boom, few venture-backed tech outfits have gone public, with the few that have (like Instacart and Klaviyo) failing to impress. In contrast, recent excitement over AI-linked businesses underscores investor enthusiasm, as evidenced by data center hardware company Astera Labs’ 72% share price surge on Wednesday.

Per the CNBC report, Reddit’s IPO price represents a reduced valuation of roughly $6.5 billion compared to its 2021 private market valuation of $10 billion. The change reflects broader market shifts in 2022 as rising interest rates dampened investors’ appetite for high-risk assets. In response, startups downsized, adjusted valuations, and prioritized profitability over growth, CNBC says.

CNBC notes that Reddit’s 2023 annual sales increased 20% to $804 million, while its net loss narrowed to $90.8 million compared to $158.6 million in 2022. Based on its recent revenue, Reddit’s IPO market cap gives it a price-to-sales ratio exceeding those of Alphabet, Meta, Pinterest, and Snap, according to CNBC.

The CNBC report identifies Reddit’s competitors as X, Discord, Wikipedia, and Amazon’s Twitch. Reddit believes data licensing could be a significant revenue source, and its SEC filing indicates it has entered into licensing agreements worth $203 million. CNBC reports Reddit plans to recognize approximately $66.4 million in revenue from these deals this year.

An expanded partnership with Google, as per the CNBC report, grants the search giant access to Reddit data for AI model training and product improvement. Additionally, CNBC reveals that the Federal Trade Commission is conducting a nonpublic inquiry into Reddit’s sale, licensing, or sharing of user-generated content with third parties for AI training purposes. Reddit stated that it was unsurprised by the FTC inquiry and that its business practices are fair.

Founded in 2005 by Alexis Ohanian and Steve Huffman (Reddit’s CEO), CNBC says existing stakeholders, including Huffman, divested a total of 6.7 million shares in the IPO. Reddit offered a directed-share program allowing moderators and users to buy stock, a practice CNBC says aligns with similar programs seen in Airbnb, Doximity, and Rivian IPOs.

Reddit’s dramatic IPO debut naturally invites speculation and comparisons to the GameStop phenomenon. Both situations saw unexpected surges in share prices, fueled by a combination of shifting market dynamics and online community sentiment. The key role of Reddit’s WallStreetBets subreddit in driving GameStop’s stock volatility highlights the potential power of Reddit’s user base to influence investor sentiment. While Reddit’s situation doesn’t necessarily mirror GameStop’s short squeeze dynamic, the IPO debut raises questions about whether Reddit’s community-driven nature could trigger similar speculative interest in the stock.

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