Thu, 03/21/2024 - 13:32
The US stock market finally reached a new all-time high this month after over a solid year of steady gains. Now, it seems as if the bulls are out in full force, with the dark days of 2022 little more than a distant memory. Indeed, the S&P 500 currently (19/03) sits at $5,172.39, while the Nasdaq 100 is valued at a cool $18,026.33, both around 75% higher than they were in December 2022. With prices at record levels, it's natural that companies would want to take advantage of higher valuations by taking this opportunity to float their firms. It may have been a while since we last had a high-profile IPO, but they don't come much bigger than a legacy social media giant like Reddit.
Reddit is set to start trading under the ticker RDDT this Thursday. Its initial public offering has already garnered huge interest from retail and institutional investors keen to take this opportunity to own a piece of this unique household name. And Libertex clients will be able to do just that via the Libertex platform. But what price is the stock likely to open at, and what kind of performance can we expect in both the short and long term? In this article, we'll try to answer these questions and more on this momentous occasion for the global equities market.
It's only a number
First, it's important to note that this isn't Reddit's first attempt at going public. It was revealed that the company confidentially filed for an IPO in December 2021 but ultimately decided not to go ahead with it. While we didn't have details of target price ranges or Reddit's financials back then, this time around, the data is much more extensive.
First, we have a firm target range of $31-$34 per share for a valuation of around $6.4 billion, down from the $10 billion they had hoped for in 2021. Nonetheless, in less than surprising fashion, the Reddit IPO is already oversubscribed by about five-fold, which means we could see prices at the end or beyond the target range. That said, the general appetite for growth stocks has taken a veritable nosedive since 2021, with interest rates at almost 20-year highs since the Fed's interest rate hike spree. Most recently, we saw this in action with the IPO of Instacart (CART), which went public at a valuation of $10 billion, which was roughly a quarter of its 2021 valuation. However, it's quite likely that over the long term, a high-profile stock like RDDT will manage to move with the wider market.
Don't sell yourself short
Another important factor with any IPO is the potential for organised shorts of the newly listed stock. Many feel that the famous maxim of "It's Probably Overpriced" holds true for many new listings, especially when made at times of all-time highs. Still, there's also a possibility that the retail cartel Wall Street Bets (which ironically shot to fame on the Reddit platform itself) could seek to turn RDDT into the next meme stock. This would mean that we might see a furious rise in the ticker's fortunes over the near term, followed by a severe crash when the bubble finally bursts.
However, we would be wise to remember that these kinds of pumps have not typically been devastating. Just look at GameStop (GME). While it's 75% down from its 2021 highs, it's still nearly 300% up from its pre-meme days. As with any stock, the chances of making gains will increase exponentially with time held, and the Reddit IPO will be no different in this regard.
Play the long game
As we've already touched upon, the short-term response to any IPO is very difficult to predict, but with Reddit, investors would be wise to look at the long-term prospects. Reddit, too, appears to have an eye on the future with its efforts to keep its user base loyal in the wake of the public offering, considering its previous opposition to attempts to monetise the platform.
For instance, Reddit has reserved around 1.76 million shares for top Redditors with high karma scores and strong moderator activity. In addition to having the option to buy at the opening price, they will also be able to sell right from the day of the IPO, an option that usually isn't given to preferential buyers. And while the company isn't yet officially profitable, its revenue was up 21% to $804 million in 2023, while losses fell 43% to $90.8 million. Moving into this year, Reddit plans to offer more advertising to its 73 million daily active users via microtargeting, which should help it grow its ad revenue going forward. The social media firm also recently signed a new $60 million per year licensing deal with Google that will see the search engine train its AI models using Reddit conversations. All of these bode well for RDDT's longer-term potential for growth.
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