(Bloomberg) -- A 67% rally for Reddit Inc. has made it one of the year’s hottest newly public companies, but quarterly results and the expiration of a restriction preventing insiders from selling are about to test those gains.
Investors are positioning for a wild week. The social media site is slated to publish second quarter results Tuesday after the bell, and the options market is pricing in about an 18% move for the shares after the report.
Then, the end of a lock-up on Friday could trigger selling pressure as long-time holders are able to cash in stock for the first time since it went public in a March initial public offering that raised $860 million. The number of shares that may hit the market this week could balloon those available for trading to more than 150 million, analysts say, from roughly 25 million.
Reddit is among the year’s best performing IPOs, gaining ground amid the artificial intelligence-fueled tech rally, even eking out a gain at one point Monday amid the epic global equity-market rout. However, the expiration of lockups can create volatility as investors try to game out the impacts of selling pressure, and the shares may yet fall victim to the demands of early supporters for liquidity.
“We would not be surprised to see some of its early investors take advantage of the stock’s strong performance and the ability to sell shares,” wrote Loop Capital Markets’ Alan Gould in a July note. The analyst’s recommendation has fluctuated with the shares lately. His cut to hold in mid-July preceded a 17% decline that accompanied the broader tech pullback, and he reinstated his buy at the end of that month.
As Gould noted concerns around selling pressure from the lockup expiration, he touted the nearly $10 billion valuation — “particularly if 2Q results and 3Q guidance are ahead of consensus” — as supportive factors.
Among the top holders with positions that include the class B shares, which tend to be held by corporate executives and early investors, are the Newhouse family’s Advance Magazine Publishers Inc., Tencent Holdings Ltd., OpenAI’s Sam Altman and Fidelity Investments.
“They want liquidity — most insiders have gotten in at a cost basis that’s substantially below the IPO price — and even if the stock is down from recent highs, those folks are substantially in the money,” said Kamran Ansari, venture partner at Headline. “From a pure financial prudence perspective, you will see some executives and early investors selling.”
Roth MKM’s Rohit Kulkarni pointed out that the 122 million class B shares would need to be converted to class A shares prior to being sold on the public market. That’s a process that can take some time.
The majority of other high-flying companies to go public since the start of 2024 still have their early investors and insiders unable to sell. That in turn means there’s a smaller pool of shares available for trading, which can lead to volatile swings on quarterly updates or enthusiasm related to trends.
“The crop of IPOs that have gone out have done relatively well,” said Matthew Witheiler, who leads Wellington Management’s diversified late-stage growth equity business. “But until their lockups expire, I really don’t judge performance because everything in the interim is a lot of noise because of how thinly-traded they are.”
(Updates with IPO size in third paragraph. A previous version corrected the organization in the eighth paragraph.)
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