Shares of Reddit slipped Friday following the social media player's strong trading debut Thursday. Despite the Reddit IPO proving an early hit, there are sill plenty of challenges ahead, including proving the company can carve its place in a market dominated by Google parent company Alphabet and Facebook owner Meta Platforms.
On the stock market today, Reddit stock lost nearly 9% to close at 45.94 in its first full day of trading. On Thursday, shares soared as much as 70% beyond the 34 offering price for the company's debut on the New York Stock Exchange. Reddit stock closed that day at 50.31, up 48%. The opening price gave Reddit a market value of about $6.4 billion.
While Reddit is still trading well ahead of its debut price, the rocky second day is a reminder that questions remain about the San Francisco company's broader business model.
Reddit IPO: Can Reddit Compete With Meta, Google?
Reddit, founded in 2005, operates one of the world's largest and most active online message-board websites. The Reddit platform hosts a stockpile of 1 billion cumulative posts across 100,000 active communities, according to the Reddit IPO filing.
Reddit last year had sales of $804 million, up 21% from 2022. But the company lost about $91 million in 2023 and is yet to turn a profit. Reddit acknowledged in its IPO filing that it was slow to monetize its platform.
"We made a profit in the back half of 2023. We grew revenue three times as fast as costs last year," Reddit Chief Executive Steve Huffman said in a CNBC interview Thursday. "I think beyond the community of Reddit, the platform of Reddit, there is actually a very nice, special business here."
But that business is competing for digital advertising dollars in a market dominated by a trio of tech giants. Google parent company Alphabet, Facebook owner Meta and and Amazon capture more than half of all digital ad spending, according to estimates by eMarketer.
Shares of smaller competitors such as Pinterest and Snapchat parent Snap have scuffled early in 2024. Revenue for both companies is growing slower than for Meta, despite Meta being significantly larger.
In a client note earlier this month, analysts at Bernstein said a key question for the Reddit IPO is whether Reddit is "just another sub-scale social player." Reddit's 2023 revenue is similar to what Pinterest achieved in 2018, Snapchat in 2017 and Twitter in 2014, the note said.
"The good news is that revenue growth (up 25% year over year in 4Q23) is up near Meta and Amazon ads levels, so perhaps Reddit is figuring out interest/contextual ads," Bernstein analyst Mark Shmulik wrote.
Reddit Also Seeking AI Licensing Boost
Reddit also hopes to monetize its platform by licensing its content to companies that train artificial intelligence models. Reuters reported last month that Reddit reached a deal worth $60 million annually with Google that will make Reddit content available to train Google's large language models.
But there some question marks around that revenue as well. Reddit disclosed last week that the Federal Trade Commission is conducting an inquiry into its licensing of user-generated content.
"Given the novel nature of these technologies and commercial arrangements, we are not surprised that the FTC has expressed interest in this area," Reddit wrote in a regulatory filing. "We do not believe that we have engaged in any unfair or deceptive trade practice."
Meanwhile, the Reddit IPO comes a day after the debut of Astera Labs on the Nasdaq. The data-center chip firm's shares jumped more than 70% Wednesday from an offering price of 36, closing at 62.03.
IPO stocks can be volatile, particularly early on. A twist for the Reddit IPO is that about 8% of the 15.3 million shares offered were set aside for Redditors, the term for the platform's users and moderators. Those users will be able to sell at any time, regardless of any lockup period, the Reddit filing said.
