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Reddit: Social media firm's shares jump in stock market debut

Reddit
[Getty Images]

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

On Wednesday, Reddit revealed that it had priced its shares at $34 each, near the top of a marketed range.

By the close of trade on Thursday its shares stood at $50.44, valuing the firm at more than $9bn (£7.1bn).

It was one of the biggest ever initial public offerings (IPO) by a social media platform.

It put 22 million of its shares up for sale and, in an unusual move, offered some of the shares to the platform's users, although it has not been disclosed how many took up the offer.

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

It is an online forum where users can discuss topics that interest them. As of the end of December 2023 it had more than 73 million users, according to the company.

But the filing brings to the forefront a question that has been bubbling for years behind the scenes - how can a business make money from what is, essentially, random conversations.

People do not pay to use Reddit - the website is completely free for people to browse, post and comment.

For 20 years it couldn't turn a profit, and some might ask why Reddit is worth billions if it has not ever made money.

It has tried a few things, and a significant visual change in 2017 made the website more friendly to advertisers.

But it seems Reddit's road to profitability has an end in sight, built around AI models.

That is because companies like OpenAI, the developer of ChatGPT, will pay for data of those random conversations.

Google is believed to have paid Reddit $60m for the right to scan almost two decades of discussions to make its AI more human-like - and Reddit has said it has agreed licensing deals worth more than $200m over the next two to three years.

In February, Reddit said it lost $90.8m in 2023, so the money from artificial intelligence (AI) firms could make the platform profitable.

Inquiries and accusations

But there are also plenty of concerns on Reddit's horizon too.

For one thing, the social media platform is facing increased scrutiny from regulators.

The US Federal Trade Commission (FTC) is already looking into how Reddit licences its data for AI models - generally speaking, regulators don't like it when big technology firms sell data generated by users.

While the platform may have seen that coming, it may have been blindsided by a challenge from Finnish firm Nokia, which is accusing it of infringing on its patents.

"We will evaluate their claims," Reddit said, adding that it's faced similar accusations in the past.

Perhaps most significant of all is that Reddit's filing with the US financial markets regulator, the Securities and Exchange Commission (SEC), notes its users as a potential risk that comes with owning shares in the company.

"If we fail to increase or retain our user base or if user engagement declines, our business... and prospects will be harmed," it said in the filing.

"If Redditors do not continue to contribute content or their contributions are not valuable or appealing to other Redditors, we may experience a decline in the number of Redditors accessing our products and services... which could result in the loss of advertisers."

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

Such is their distaste for changes made in recent years, a search on the platform for chief executive Steve Huffman - username u/spez - shows that when Redditors mention him the comments are usually preceded by foul language.

Despite growing discontent, threats to leave the platform - such as the blackout that rendered much of Reddit unusable in 2023 - have often proved short-lived.

And although there have been efforts to create an alternative platform, one of Reddit's biggest pluses is something it does not have - a significant rival.

While there may be concerns from Redditors, the social media platform seems to be on relatively safe ground when it ties its stock market value to its users, so long as there is nowhere else for them to go.