After much anticipation, the social network Reddit (NYSE:RDDT) made its public market debut on Thursday afternoon. Notably, CEO Steve Huffman remarked in an interview that the platform posted a profit in the back half of 2023. Subsequently, RDDT stock opened trading at $51.70 before engaging in wild trading dynamics. Questions still plague the company, which may set the tone for other initial public offerings.
Fundamentally, one of the main challenges for RDDT stock centers on profitability or the lack thereof. According to Time, “Reddit has never profited from its broad reach while piling up cumulative losses of $717 million. That number has swollen from cumulative losses of $467 million in December 2021 when the company first filed papers to go public before aborting that attempt.”
However, one of the biggest developments in RDDT stock came out earlier today. In an interview with CNBC, Huffman revealed that the bottom-line criticism wasn’t entirely accurate. Per Huffman, “We made a profit in the back half of 2023. We grew revenue three times as fast as costs last year.”
After highlighting the power of the Reddit community, the head executive also revealed that the company’s “gross margins are very high, the high 80s, and have been for a long time.” This reveal may have helped spark significant upside momentum for Reddit stock.
Questions Still Cloud RDDT Stock as It Sets IPO Tone
Another issue among several that clouds the debut of RDDT stock is the size of the underlying enterprise. Per Time, “[b]y the tech industry’s standards, Reddit remains extraordinarily small for a company that has been around as long as it has.”
At the IPO price of $34 per share, Reddit carried a market capitalization of $6.4 billion. On the other hand, Meta Platforms (NASDAQ:META) — which started 18 months earlier than Reddit — enjoys a market cap of $1.3 trillion as of the time of writing. Also, Meta generates annual revenue of $135 billion, while Reddit’s top line comes in below $1 billion.
Naturally, Wall Street will be closely following how the pricing dynamics of RDDT stock unfolds in the days ahead. After an astonishing, record-breaking rise in 2021, only 181 new listings materialized the following year. This trough represented an 82.5% slump.
Therefore, Julian Klymochko, CEO of alternative investment solutions firm Accelerate Financial Technologies, remarked that “[i]f Reddit trades poorly, it will cast a shadow over the IPO market. Many companies will hit pause on their IPO initiatives.”
Adding to the pressure is what Reuters labels a risky retail allocation. With 8% of the RDDT stock IPO reserved for eligible Reddit users and moderators and with no lock-up period, they could potentially choose to sell whenever they want. This situation further clouds the otherwise hot debut.
Why It Matters
Shortly after the launch, RDDT stock dropped to a low of $46.62. It quickly shot up to a high of $57.80, with the price action trading near this price level. However, volatility started kicking in at around 1:37 p.m. ET. At the time of writing, RDDT is near the bottom of the day’s range at around $49.
On the date of publication, Josh Enomoto did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
