Reddit: Stocks of social media companies soar on stock market debut

Shares of social media site Reddit closed 48% higher on the company's first day of trading on the New York Stock Exchange.

On Wednesday, Reddit said it had priced its shares at $34 a share, near the top of its market price range, valuing the business at $6.4bn (£5bn).

By the close of trading Thursday, each share was worth $50.44.

This was one of the largest initial public offerings (IPOs) by a social media company in history.

The company put 22 million of its own shares up for sale and, in an unusual move, offered some of its shares to users of its platform, although it was not clear how many users took up the offer.

Reddit was founded nearly 20 years ago and has become one of the most popular websites in the world.

This is an online forum where users can discuss topics of interest. According to the company, the number of users exceeded 73 million as of the end of December 2023.

But the filing brings to the fore a question that has been brewing behind the scenes for years: How can a company profit from what is essentially a random conversation?

There is no charge to use Reddit. This website is completely free to browse, post and comment.

Some may wonder why Reddit is worth billions when it hasn't been profitable for 20 years and has never turned a profit.

We tried a few things, and in 2017 we made some major visual changes to make our website more advertiser friendly.

But Reddit's path to profitability, built around AI models, appears to be coming to an end.

Companies like OpenAI, the developer of ChatGPT, will be paying for these random conversation data.

Google is believed to have paid Reddit $60 million for the right to scan nearly 20 years of discussions to make its AI more human-like, and Reddit is expected to earn more than $200 million in licenses over the next few years. announced that they had agreed to a contract.

Reddit said in February that funding from artificial intelligence (AI) companies could put the platform back in the black after a $90.8 million loss in 2023.

However, there are also many concerns about Reddit's future.

First, social media platforms are facing increased scrutiny from regulators.

The US Federal Trade Commission (FTC) is already investigating how Reddit licenses data from its AI models. Generally speaking, regulators don't like big tech companies selling user-generated data.

The platform may have seen it coming, but may have been blindsided by a challenge from mobile phone company Nokia, which has accused it of infringing its patents.

“We will evaluate their claims,” ​​Reddit said, adding that it has faced similar accusations in the past.

Perhaps most importantly, Reddit's filings with the Securities and Exchange Commission (SEC), the U.S. financial market regulator, outline the potential risks associated with users owning shares in the company. That's what I'm pointing out.

“If we fail to grow or maintain our user base or experience a decline in user engagement, our business and prospects would be harmed,” the company said in a filing.

“If Redditors do not continue to post content, or if their postings are not valuable or attractive to other Redditors, the number of Redditors accessing our products and services may decline. …which could result in losses for advertisers.”

Reddit's user base has been known to react with dissatisfaction to changes made on the platform.

Such is their distaste for the changes that have taken place in recent years, that if you search for CEO Steve Huffman (username u/spez) on the platform, you'll see comments from Redditors mentioning him. It can be seen that is often preceded by a foul word.

While efforts have been made to create alternative platforms, one of Reddit's biggest advantages is something Reddit doesn't have: significant competitors.

While there may be concerns from Redditors, unless users have nowhere else to go, social media platforms seem to be in a relatively safe position as they connect users with stock market values.