What Was Unusual About Reddit's IPO?
Reddit is a website that functions as a massive forum. You can find communities there on virtually any topic you can think of, and get detailed answers from highly knowledgeable professionals on questions of every kind.
Reddit's communities are run by volunteers. These volunteers invest significant time in moderating members, removing inappropriate content, and so on. This dynamic periodically creates tension between them and Reddit's commercial owners, since the site's users see themselves as the rightful owners of the content they've created, while the company's owners view it as a private commercial asset.
A few days ago, the company went public via an IPO.
What set this offering apart from others was the fact that no capital was raised from institutional investors ahead of the public listing.
In a typical IPO, a pre-IPO funding round is conducted targeting institutional investors. These investors purchase large blocks of shares at a relatively low price — meaning they lock in a profit on the share price from the very moment of launch.
Reddit, as a community-driven company, decided to give all investors an equal opportunity and skip directly to the public offering stage.
Many retail investors poured into the stock, eager to take advantage of the opportunity and buy in at a lower-than-usual opening price. These investors are anticipating an initial price surge they can sell into, netting a solid percentage gain in a short period of time.
In my estimation, those investors will soon discover they've come out at a loss. The initial hype is built in part on the large number of retail investors who jumped at the opportunity without examining the company's profitability, driven purely by the desire to flip the stock for a quick profit.
The practical result will likely be that these shares flow back into the market, creating high supply and a significant drop in the stock price.
In any case, the company does not currently appear to be an attractive investment, and the IPO seems designed to enrich its owners rather than to raise capital for growth.
The one thing that could give the company genuine value is artificial intelligence language models — since training them on Reddit's content may require payment. In that scenario, Reddit's ownership of a large volume of professional content could prove particularly lucrative, lending its stock real underlying value.
Reddit's ownership is also shared by Sam Altman, who currently holds 9%, and Chinese company Tencent, which holds 11%. It's reasonable to assume that their interest in the company stems from the value of its data for training AI-based models.