Reddit investors shrug off hold rating, bid up stock another 9% as post-IPO rally continues

Technology

Reddit CEO Steve Huffman stands on the floor of the New York Stock Exchange (NYSE) while ringing a bell on the floor setting the share price at $47 in its initial public offering (IPO) on March 21, 2024 in New York City. 
Spencer Platt | Getty Images News | Getty Images

Reddit’s post-IPO rally continues, despite the company receiving a hold rating from a prominent analyst.

Reddit shares were up by 15% during midday trading on Tuesday to around $68.88, underscoring investor interest in the company, which was the first major social media business to go public since Pinterest’s 2019 IPO. The company’s shares were up about 30% on Monday during end-of-day trading, kicking off Reddit’s first week as a publicly traded business following last week’s IPO, in which it raised about $750 million.

Some 34.9 million Reddit shares changed hands on Tuesday, the most since 48.7 millions shares were traded on the company’s opening day on the market. Reddit and existing shareholders sold a total of 22 million shares in the IPO.

Investors continue to rally behind Reddit despite New Street Research issuing a neutral rating on the company “after the stock goes to the moon,” analysts wrote in a note that was published Tuesday.

Analysts at New Street Research, which was the first analyst firm to issue a stock rating on Reddit, said that they wouldn’t change their $54 price target, and that they expect “volatility into the first earnings report (date still TBD, we assume early May) and three days after when the lockup expires,” referring to the 180-day period that certain Reddit shareholders are prohibited from selling their shares.

New Street analysts wrote that “an OpenAI data licensing win is baked into the stock,” implying that investors believe that Reddit will financially benefit if it inks a data-licensing deal with the ChatGPT maker. Investors expect such a deal “to be added soon,” considering OpenAI CEO Sam Altman maintains a 9% stake in Reddit.

Altman was a Reddit investor, a former board member and one of its biggest shareholders, along with Chinese tech giant Tencent and Advance Magazine Publishers, the parent company of publishing giant Condé Nast. His stake in Reddit increased by $200 million to about $613 million following the company’s IPO.

New Street analysts explained that the upside case for Reddit’s data licensing business hinges on the current boom in generative artificial intelligence, driven by large language models and related models that power software like ChatGPT’s text-generation software and Google’s Gemini image-generation tool. Although Reddit’s core business is online advertising, it has pointed to data licensing as a potential big revenue source. It also recently entered into an expanded partnership with Google, allowing the search giant to access more Reddit data to train its AI models.

However, New Street analysts noted that the Federal Trade Commission is conducting an inquiry into Reddit’s data licensing business, which Reddit revealed earlier in March in a corporate filing, saying that it was “not surprised that the FTC has expressed interest” and that it does “not believe that we have engaged in any unfair or deceptive trade practice.”

“At first blush, it seems relatively benign, but it could be an overhang,” the New Street analysts wrote, noting that the “FTC inquiry could slow the pace of new deal signings and will certainly require attention and time dedicated to addressing the inquiry (i.e., opportunity cost for RDDT’s legal team).”

Meanwhile, some Reddit users took to the company’s various finance-related subreddits on Tuesday to discuss the company’s rising shares since its IPO. Several of these users, along with certain company employees and their family members, were part of Reddit’s directed-share program and not subject to a lockup period, thus allowing them to collectively make millions of dollars in profits the day that Reddit went public on the New York Stock Exchange.

One Reddit user with the username “bkarp00” wrote about the Reddit rally, “Looks like all the quick cash IPO people out are helping it rally today with less people willing to sell at these levels,” referring to shareholders who believe that Reddit’s stock will continue to increase in value.

Another Reddit user with the username “memory–” agreed, explaining, “if facebook’s users are worth $30B a quarter year and most of them dont reddit and most redditors don’t facebook, how much is reddit undervalued?”

User “IrishRun” wrote, “I’ve been kicking myself for not buying more shares, but there was no guarantee I would have received the requested number and then I would probably still be wishing I’d bought more.”

Meanwhile, inside Reddit’s infamous r/WallStreetBets subreddit, known for popularizing so-called meme stocks like GameStop, many members were ignoring the Reddit rally in favor of pontificating on the Nasdaq debut of Trump Media & Technology Group, during which shares rose about 50% on Tuesday morning.

Watch: Cramer’s Mad Dash Reddit

Articles You May Like

Salman Rushdie says knife attacker came at him like a ‘missile’
Tesla Cybertruck to get a 20% charge speed increase
Oil prices fall after Israel reduces troop presence in Gaza
King could attend more engagements in weeks as palace plans for cancer treatment progress
Police arrest 12 people involved in Israel arms embargo protest at Labour HQ