What the Reddit IPO tells us about the US tech market

The listing of social media platform Reddit [NYSE:RDDT] this week went exceptionally well: the company’s IPO price was $34 a share but by the end of the first trading session it closed up at $50.44, a gain of 48% on the day.

In total, Reddit’s share sale raised $748mn, of which the company will receive $519mn with the rest going to existing shareholders.

There are a lot of pluses about Reddit – it has 73 million users and it made a very solid income from advertising in 2023 – but there are also some risks linked to the company.

“The company has an outsized place in investor consciousness and social media culture, after the core role of its 15 million subreddit r/wallstreetbets in the 2021 meme stock craze. Yet it remains a relatively small loss-making business, with its users, revenues, and market capitalisation still a small fraction of peers like Meta, Snap, and now unlisted X (Twitter),” said Ben Laidler, Global Markets Strategist at investment platform eToro.

Reddit has been going for almost 20 years and until now has not made an operating profit. It is still a relatively junior contender with its 73 million members compared with Facebook’s 3bn members or TickTock’s 1.56bn presence.

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There is significant potential for positive change here as the listing itself is part of the company’s strategy of “growing up”, away from anything-goes type discussion boards with relatively low levels of restriction or control.

The company plans on tightening up the rules and diversifying income beyond advertising including using AI to grow its business.

Being forced to delay its IPO last year because of market conditions meant the company had a chance to build up other ecommerce revenue income and licence access to its data to companies who want to train their artificial intelligence models. Its revenues in 2023 were up 20% at $804mn against an overall loss of over $900mn.

Reddit IPO tells us a lot about the tech market

But what is potentially more interesting for investors is what the Reddit listing is telling us about tech IPOs and the tech market going forward this year. It signals that the risk appetite is back, that investors are craving new names to add to the list of Meta NASDAQ:META, Google NASDAQ:GOOGL and Nvidia NASDAQ:NVDA and that other tech stocks slated to have IPOs later this year could do equally well.

One of the expected IPOs is technology and consulting services firm Synechron. A recent IPO is Astera Labs [NASDAQ:ALAB], an artificial intelligence infrastructure related group that listed on Nasdaq just a day before Reddit and surged 72% in the first day of trading. Another one is Intel’s division Programmable Solutions Group which will be spun off and IPOed as a separate business.

The IPO pipeline could be close to 100 strong according to Nasdaq’s chief executive Adena Friedman who recently said that almost 100 companies have filed confidentiality with the SEC ahead of their initial public offerings.

A market that has been starved of new opportunities for almost two years is coming back, the money that investors have kept out of the game for this period is making its way back into the market and the tech sector will remain a hot favourite.

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