Reddit Inc.’s first-day jump fattened the wallets of the social media platform’s users who were given the unusual opportunity to buy shares at the initial public offering price as well as longtime investors benefiting from the rebound in the company’s valuation.

Touting its plan to profit from the growth of artificial intelligence, Reddit’s shares climbed 48 per cent in its trading debut Thursday after pricing at the top of a marketed range to raise US$748 million in the fourth-largest U.S. IPO of the year. The stock was lower by as much as five per cent in premarket trading on Friday.

At the closing price of $50.44, San Francisco-based Reddit has a market value of $8 billion. Including stock options and restricted share units, the company’s fully diluted valuation is closer to $9.5 billion, based on filings with the U.S. Securities and Exchange Commission. That’s about $3 billion more than its valuation in Tuesday’s share sale and just shy of the $10 billion figure it had achieved in a 2021 funding round.

The strong showing by Reddit, along with AI-focused semiconductor connectivity company Astera Labs Inc. whose shares have gained 78 per cent since its IPO Tuesday, provides a promising market check for other IPO candidates such as Microsoft Corp.-backed data security startup Rubrik Inc. and health-care payments company Waystar Technologies Inc.

“What we’re seeing today is Reddit reaping the benefits of being a first mover after a lengthy IPO drought,” said Saar Gur, a general partner at venture firm CRV, which isn’t an investor in Reddit. “There’s value, regardless of how rock solid a company is, of being the first company out because you’re going to get a lot of attention and chatter about the market as a whole.”

The returns realized by Reddit’s stockholders will be a focal point for those deciding whether to pursue IPOs of their own.

Executive stakes

Almost a third of the 22 million shares sold in the IPO were owned by Reddit’s executives and employees, who got a $228 million payday at the $34 IPO price. Chief Executive Officer Steve Huffman was set to sell 500,000 shares in the IPO while Chief Operating Officer Jennifer Wong planned to sell 514,000, according to the filings. With Thursday’s gains, Huffman and Wong’s remaining personal stakes in the company surged to $210 million and $81 million, respectively.

Reddit’s most loyal users were able to buy eight per cent of the shares at the IPO price, an opportunity typically reserved for institutional investors, and saw a total return in the aggregate of about $29 million by day’s end.

The biggest winner was the Newhouse family, whose Advance Magazine Publishers Inc. will continue to own about a quarter of Reddit. The family’s $10 million initial investment in the nascent social-media company in 2006 is now worth more than $2.1 billion.

If Thursday’s gains hold, the big winners will include venture capital firms and other high-profile investors that took stakes before the company’s valuation first surged. Even investments in two high-priced financing rounds in 2021 — before the company’s value plunged — have now largely recovered from that dip.

Tencent, Altman

At the $34 IPO price, investors such as affiliates of Tencent Holdings Ltd., Fidelity and OpenAI’s Sam Altman among others, as well as Advance Magazine Publishers, stood to lose about $286 million on those particular portions of their holdings, which were bought for $42.47 and $61.79 a share. Thursday’s gains cut the combined loss for those two rounds to $42 million, a shortfall likely offset by returns from earlier investments in Reddit at bargain prices.

Other major Reddit investors include Vy Capital and Quiet Capital and Tacit Capital, according to the filings.

Reddit’s more than two-year slog to listing reflects the ups and downs of the market, beginning with its initial confidential filing in 2021, when IPOs on U.S. exchanges set an all-time record of $339 billion, according to data compiled by Bloomberg. IPOs in the U.S. have tumbled since then, reaching only $26 billion last year, the data show. Reddit’s listing pushes the total raised by IPOs via US exchanges this year to about $8.8 billion. That’s an increase of around 152 per cent at this point in 2023.

One benefit of Reddit’s slow route to the public market is that enthusiasm for the AI revolution has continued to mount. The potential of AI was at the center of Reddit’s proposed value proposition to investors, as companies eye the record-setting rallies in stocks like chipmaker Nvidia Corp.

AI opportunity

“Large language models need data,” Wong told Bloomberg TV. She described the company’s 19 years worth of “human experience organized by topic, with moderation and relevance — that is incredibly important to building both a chat capability and the freshness of information. That is an area where we see opportunity.”

While numerous comments on Reddit boards, known as subreddits, before the IPO featured sometimes profane comments about shorting its stock, some users posting Thursday acknowledged the value of Reddit for training AI models.

Mandeep Singh, senior industry analyst for Bloomberg Intelligence, argued even before the pricing that the company could be worth as much as $10 billion. Reddit’s $34 IPO price translated to a enterprise value-to-sales multiple between Meta Platforms Inc.’s eight-times multiple, and the four-times multiple of digital ad peers like Snap Inc. and Pinterest Inc., Singh told Bloomberg Radio on Thursday. 

“You pay for growth, and for Reddit, which accelerated growth in the past six months, it just makes a strong case that it should be at a premium multiple,” Singh said.

Reddit said it’s in the early stages of allowing third parties to license access to data on the platform, including to train artificial intelligence models. The company said that in January it entered into data licensing arrangements with an aggregate contract value of $203 million and terms ranging from two to three years. It expects a minimum of $66.4 million of revenue from those agreements this year, according to the filings.

Reddit also has announced a deal with Alphabet Inc.’s Google, allowing Google’s AI products to use Reddit data to improve their technology. Large language models often need vast troves of human-generated content to improve.

Founded in 2005, Reddit averaged 73.1 million daily active unique visitors in the fourth quarter, according to its filings. The company reported a net loss of $91 million on revenue of $804 million in 2023, compared with a net loss of about $159 million on revenue of $667 million a year earlier.

The IPO was led by Morgan Stanley, Goldman Sachs Group Inc., JPMorgan Chase & Co. and Bank of America Corp., according to Reddit’s filings. Reddit’s shares are trading the New York Stock Exchange under the symbol RDDT.