Reddit's IPO could be a bellwether for other offerings this year, says Vanderbilt professor

By James Rogers

"This IPO reminds me of when Snap went public in March 2017," says Josh White, assistant professor of finance at Vanderbilt University and a former financial economist for the SEC

Reddit's impending IPO could be a trailblazer for other public offerings in 2024, says Josh White, assistant professor of finance at Vanderbilt University.

"My sense is that the Reddit IPO could be a bellwether for IPOs in general this year," he told MarketWatch, via email. "If this IPO is oversubscribed and we see a large first day pop followed by price stability or increases after the IPO, we might see other companies come off the sideline and try to go public."

Reddit's closely watched initial public offering is between four and five times oversubscribed, according to a Reuters report. Citing people familiar with the matter, Reuters reports that the social-media platform is set to at least reach its target price of $31 to $34 a share. The IPO will price Wednesday, the report said.

Related: Reddit's impending IPO is up to five times oversubscribed, report says

Reddit declined to comment on the report that its offering is oversubscribed, citing the quiet period during which companies are not allowed to publicly comment on their IPOs before they start trading.

White, a former financial economist for the SEC, noted that Reddit's planned valuation of up to $6.4 billion is significantly below its previous valuation of $10 billion. "I suspect there are many private companies that wish to avoid a private down round and instead would like to go public so many of the early investors can achieve liquidity," he said.

The Vanderbilt professor also said that the market is hungry for a technology IPO. "We have seen a dearth of IPOs in general since the Federal Reserve began raising target interest rates," he said. "High growth companies are more sensitive to increases in interest rates because the profitability may not occur for several years. When rates increase, investors must place a lower value on those profits that come well into the future."

Related: Reddit could use this strategy to 'monetize aggressively' following its IPO

Reddit is not yet profitable, although the company has been touting the importance of artificial intelligence to its future, noting that its content could be used to feed AI and large-language models.

The company's revenue was $804 million in 2023, an increase of 21% from 2022.

Vanderbilt's White also points to Snapchat parent company Snap Inc. (SNAP), which went public in 2017 and has been enjoying adjusted EBITDA growth at around 20% per year. "This IPO reminds me of when Snap went public in March 2017," he wrote. "Both companies are social media based and have yet to be highly profitable, but have an allure of investors to invest in a growing company."

Related: Why Reddit's IPO could offer an 'unprecedented' twist in meme-stock saga

Like Snap, Reddit is also a well-known company, according to White, highlighting its role in the meme stock phenomenon. Reddit is home to the WallStreetBets subreddit, which played an important role in the meme-stock frenzy of 2021 that sent the stocks of AMC Entertainment Holdings Inc. (AMC) and GameStop Corp. (GME) skyrocketing.

The Vanderbilt professor also acknowledged the relative novelty of Reddit allowing users and moderators to invest directly in the IPO. Users and moderators who created an account on or before Jan. 1, 2024, and are "in good standing" are potentially eligible for the directed share program, the company said in its S-1 filing.

In its S-1 filing, Reddit cited the popularity of WallStreetBets among retail investors as a risk to its stock price, which it said could experience "extreme volatility" for reasons unrelated to the company's "underlying business or macroeconomic or industry fundamentals." Effectively, this is an acknowledgment that it could become a meme stock.

Related: Reddit's offering marks return of 'junk stock IPO,' New Constructs says

"This is an unprecedented situation, absolutely," Don Montanaro, president of retail brokerage Firstrade, told MarketWatch earlier this month. "The meme-stock phenomenon has played out with stocks that were already out and listed for some time. Here we have the debate and the possibility of a stock being a meme stock before it's even public."

Earlier this month independent equity-research firm New Constructs warned investors to avoid Reddit's IPO. "Reddit's IPO marks the return of the junk IPO," New Constructs CEO David Trainer wrote in a note. "We think the company may never monetize its platform without angering its users, and the entire premise of Reddit is user-generated content. This business model is inescapably built on a catch-22: Make money or please users."

-James Rogers

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03-18-24 1505ET

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