The Reddit IPO is arguably the most anticipated initial public offering (IPO) of 2024 so far. The social media company filed its IPO paperwork in late February, with plans to price its offering in the $31 to $34 per share range. This will give it a roughly $6.5 valuation – and puts it in the running to be one of the biggest IPOs in U.S. history.
The platform was founded in 2005 by University of Virginia roommates Steve Huffman and Alexis Ohanian, as well as Aaron Swartz. Reddit was sold to Condé Nast Publications a year later and then spun out in 2011.
The company has grown by leaps and bounds over the past two decades. In Q4 2023, Reddit, which describes itself as "a community of communities, driven by interests and passions," averaged 73 million daily active unique users and 267 million weekly active unique users.
According to the regulatory filing, the company says that it is going public in order "to advance our mission, become a stronger company, and provide meaningful benefits to our community."
The upcoming IPO is expected to occur later this month. Reddit will trade on the New York Stock Exchange (NYSE) under the ticker symbol RDDT.
What is the Reddit IPO?
"An initial public offering enables a private company to 'go public,' or start trading in public markets, by issuing its own shares on a stock exchange for the first time. In this way, any investor can buy shares and the company can raise capital to grow," writes Kiplinger contributor Tom Taulli in his feature "What Is an Initial Public Offering (IPO)."
One difference between the Reddit IPO and more traditional public offerings is that employees of the social media company will be allowed to sell their shares during the offering. Typically, company "insiders" such as the founders, managers and employees – and sometimes early investors – are restricted from selling their shares during what's known as a "lockup period" that generally lasts between 90 to 180 days.
The Reddit IPO will be focused on its users too. In addition to the company reserving 1.5 million Class A shares to help fund community-related programs that are important to its users, Reddit is allowing a set amount of users the opportunity to buy IPO shares at the offering price via a directed share program.
Should I buy the Reddit IPO?
Many high-profile tech insiders were early investors in the social media company. OpenAI CEO Sam Altman, for one, has invested at least $60 billion in Reddit and controls 9.2% of voting power. Peter Thiel, who co-founded PayPal Holdings (PYPL) and Palantir Technologies (PLTR), as well as Chinese tech conglomerate Tencent Holdings (TCEHY), were also early investors.
Despite early backing from heavy hitters in the tech sector, retail investors may want to hold tight before rushing out to buy the Reddit IPO.
While IPO stocks tend to have strong first-day showings, returns for the first year are generally weak, says the team of analysts at Trivariate Research, a market research firm based in New York. And since 2020, "the average IPO has lagged its industry average by 30% over the subsequent three years following its first closing price."
David Trainer, CEO of New Constructs, a research firm powered by artificial intelligence, takes a more direct stance on whether or not the Reddit IPO is worth buying.
"Reddit's IPO marks the return of the junk IPO," Trainer says. "[The valuation] implies that Reddit will grow its user base to 26 times current levels, which would be nearly five times the size of Snap (SNAP) and a highly unlikely feat. Reddit looks overvalued, and we think investors should pass on this IPO."
Other commenters have noted that Reddit's allotment of shares to select Redditors could lower demand on the first day of trading, which would work against any IPO pop.
Of course, not all new stocks are bad buys. While its true shares of Arm Holdings (ARM) struggled in the immediate aftermath of its September public offering, they have nearly tripled in price value since late October.
Honestly, whether or not you buy the Reddit IPO boils down to your own personal investing goals and risk tolerance. If you do decide to buy Reddit stock when it first begins trading, do so in a small amount that you can afford to lose.
