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Reddit IPO success

Reddit IPO success could push more firms to list

Thu, 04/04/2024 - 15:30

Amid a stock market that has been slowly recovering from a whirlwind period of extended volatility and out-of-control inflation, traders and investors are only just starting to regain confidence in equities despite the key US indices making steady gains for the past eighteen months now. In fact, the big catalyst for the restoration of faith was the new all-time highs recorded in late March, which saw the S&P 500 and Nasdaq 100 top $5,200 and $16,400, respectively.

Then came one of the biggest IPOs in recent years: internet giant Reddit. Trading began under the ticker RDDT last Thursday, 21 March, with the social media firm's initial public offering garnering massive demand from retail and institutional investors alike. Reddit initially targeted a price of $31–$34 for a $6.4 billion valuation, but they didn't anticipate what would happen next.

In an explosion of interest from the full spectrum of investor profiles, RDDT opened at around $50 per share. By Tuesday the next week, it had gained another 30% to rise above $65. Since then, the decline has been sharp, but at $50.25 as of 3 April, RDDT is worth pretty much exactly the same as it was on IPO day and over 50% more than the level the company had initially valued it at. So, what does this mean for Reddit and other US stocks going forward, and is this positive market trend likely to spark a spate of IPOs in the near term?

Beware the IPO

As Warren Buffet likes to say, IPO stands for "It's Probably Overpriced". While this isn't always the case, it can often be true of high-profile offerings at times of market highs. In the case of Reddit, there definitely was an aspect of this at play, but it appears to have been more than balanced by organised short-selling surrounding the launch of the ticker. In the end, we saw typical IPO behaviour of elevated volatility in the immediate aftermath of the listing, followed by a normalisation over the subsequent week. With a current price in and around its opening level and the targeted shorting apparently at an end, one has to think that Reddit's prospects look fairly positive from here on out.

As we've already mentioned, a price of $50+ is a solid 50% more than what Reddit was hoping for when it published its 2024 IPO documents. This puts the company's market valuation closer to its 2021 target of $10 billion and bodes well for investors' assessment of RDDT's future growth potential. If anything, this is confirmation that the best strategy for IPOs is to wait for the dust to settle and make an informed decision about if and how much to invest once the initial excitement has subsided. Having gained almost 10% on 2 April alone, it looks like Reddit could be on track to set a new high over the coming weeks as wider risk appetite appears to be increasing amid a strong US labour market and tamed inflation.

The first of many?

IPOs are a lot like buses in that you can wait forever without seeing one, and then several will come at once. Now, it's safe to say that the Reddit IPO has been a relative success, and with the scintillating stories of other lesser-known names already this year, we could be in for a raft of listings in the coming weeks and months. Perhaps the most successful of 2024 so far has been that of Santa Clara-based chipmaker Astera Labs, whose stock skyrocketed over the first week of trading last month (20–25 March). Much like Reddit, a slew of profit-taking and shorting brought declines in the days that followed, but the tech stock seems to have settled to a respectable $72.25 as of 3 April. That's a full 16.4% above its opening price of $62.03.

With over 32 late-stage startups worth $2 billion or more in the Bay Area alone, there are plenty of potential candidates for a 2024 IPO. In fact, Denver-based digital promotions startup Ibotta is already planning its stock market debut, and many analysts have suggested that Stripe and Databricks — worth an estimated $50 billion and $43 billion, respectively — are also likely to want to take advantage of the increase in bullish sentiment to bring in maximum funding for minimal equity. All of this will likely buoy the S&P 500 and Nasdaq 100 through to the end of the year, provided that the US Federal Reserve delivers on its more dovish policy promises.

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