Written by Olivia Knapp
Many companies decided to issue their shares on the public market in 2021 amid near-zero interest rates. As the Federal Reserve increased rates to combat subsequent inflation in the post-covid era, the IPO market experienced drastically less activity. Despite this slump in equity capital market activity, IPO success increased over time during these couple of years, with a greater magnitude of profitable IPOs in 2023 than in 2022. In terms of the tech sector, there were only five tech IPOs in 2024 and two in 2023 (Barclays). A successful first quarter of 2024 provides hope for a turning point in the equity capital markets. On a broader scale, equity market gains in the later months of 2023 and the beginning of 2024 led stock indices to all-time highs. With some of the most narrowly focused markets in nearly 40 years, this growth has mainly been driven by several mega-cap companies in the tech sector as demand for artificial intelligence increases. It is not surprising that the two major IPOs improving the 2024 equity capital markets outlook, Reddit and Astera Labs, fall under the technology sector.
Reddit, a nearly 19-year old social media company known for its online forums covering a wide range of niche topics, has recently decided to go through with its decision to become a publicly held company. After pulling its IPO in 2021 as tech markets began to plunge, Reddit decided to publicly list its shares at the beginning of 2024. The social media company listed 22 million shares on the New York Stock Exchange on March 21, 2024, at the higher end of its target range at $34 per share, yielding a $6.4 billion valuation, a decrease from the $10 billion valuation it sought in 2021 (Driebusch & Needleman, 2024). With the 15.3 million new issuances, Reddit will raise roughly $519 million in its IPO. Major shareholders in the company include OpenAI CEO Sam Altman and Advance Magazine Partners, the parent company of Reddit and Conde Nast (Savitz, 2024). Reddit outlined various risks in investing in their company – a total of 55 pages in the S-1 filing. To put this in perspective, the risks section of Reddit’s S-1 is about twice as long as Facebook’s and Uber’s combined. The risks outlined in the S-1 revolve around two major themes: lack of profitability and user uncertainty. After 19 years of operations, Reddit has never turned a positive profit and does not guarantee that it will be able to in the future; however, Reddit is trying to paint the less negative profit attributed to its data-licensing business launch and subsequent AI content licensing deal with Google in recent years as a sign of growth. Although Reddit outlined many initiatives to monetize aspects of its platform and potentially increase revenue, none will make a significant impact compared to Reddit’s driving force of revenue – advertising (“Reddit, Inc,” 2024). The other main risk factor relates to the unique aspect of this IPO, with Reddit granting some of its most loyal users the ability to buy Reddit shares at the IPO price, which is somewhat unheard of in the realm of IPOs. Typically, the IPO price is reserved for large institutional investors, like hedge funds and mutual funds, not ordinary people. This unique feature is a testament to how much Reddit relies on its user base for success. Reddit cannot control how users act on their platform, especially since forum moderators are unpaid. Despite skepticism, Reddit shares soared on its first day of trading, reaching nearly a $10B valuation on a fully diluted basis after closing at $50.44 per share – a 48% jump from the strike price (Driebusch & Needleman, 2024). Reddit shares have the potential for long-term growth if it can execute additional AI deals (Ossola & Needleman, 2024). Additionally, Reddit is not an AI company, but people may start to turn to Reddit for a human response in the midst of the AI frenzy.
Although the Reddit IPO has taken over headlines due to the company’s recognizable name, Astera Labs performed just as well, if not better, in its recent IPO. Astera Labs is a chip company providing connectivity solutions to power AI infrastructure. Astera Labs CEO Jitendra Mohan breaks this down, explaining that every time a prompt is submitted to ChatGBT, there is an extensive network of computers processing the request, and Astera Labs creates cords to enable these different systems to communicate and provide accurate and quick responses (CNBC, 2024). Astera Labs started trading on the NASDAQ one day before Reddit, on March 20, 2024, and issued 19.8 million shares of common stock priced $2 above its target range, at $36 per share. With roughly 16.8 million new issuances, Astera Labs will raise nearly $713 million in its IPO. The Astera Labs S-1 filing outlines much fewer risks than Reddit, mainly concerning general risks that come with the newness and uncertainty of the AI wave (“Astera Labs, Inc.,” 2024). One of the main attractions to Astera Labs is its high-profile client base, with its main clients being tech giants NVIDIA, AMD, and Intel. Although these companies can be attributed to helping drive the equity markets to record highs, they represent about 70% of Astera Labs’ revenue concentration and highlight the risk of a lack of diversification in Astera Labs’ client base. The company is also fairly new, as many companies trailblazing the AI frenzy are, which poses the risk of lack of experience in the industry. Astera Labs was not profitable until last quarter, but the success of its IPO suggests this growth will continue (CNBC, 2024). Despite speculation and high volatility surrounding AI, shares in Astera Labs rose over 70% on its first day of trading (Driebusch & Needleman, 2024). Since there is such a high demand for AI, Astera Labs has growth potential.
There is hope that the unanticipated magnitude of success of the Reddit and Astera Labs IPOs will revive equity capital markets and encourage other companies to make the step of going public. Other tech companies – Stripe, Chime, and Databricks – have already lined up to go public in 2024 (Katzeff & Collins, 2024). The equity capital markets focus for the rest of 2024 will be on creating a high-quality shareholder base and a robust aftermarket performance, as well as setting an optimal IPO price. Most companies planning to go public in 2024 will likely do so in Q2 or Q3, with the upcoming election in Q4 bringing uncertainty and volatility (Reed, 2024). Although equity capital markets showed a strong performance in the first quarter of 2024, they are still not clear with the enormous uncertainty surrounding interest rates and growing geopolitical tensions. Equity market gains across various sectors have mainly been driven by consumer optimism that the Fed will start cutting rates at their June meeting until recent data showed strong labor markets – a signal that the Fed has been unable to rid inflation. The new question is if the Fed will cut rates this year, not when, which could hurt equity markets. The NASDAQ, DOW, and S&P 500 all closed the week at a loss when the pivotal labor market data was announced.
References
“AI is still in the early stages of development, says Astera Labs CEO.” CNBC, 20 March 2024, https://www.cnbc.com/video/2024/03/20/ai-is-still-in-the-early-stages-of-development-says-astera-labs-ceo.html.
“Astera Labs, Inc.” United States Securities and Exchange Commission Form S-1, 20 February 2024, https://www.sec.gov/Archives/edgar/data/1736297/000119312524040419/d285484ds1.htm#rom285484_2.
Driebusch, Corrie, and Sarah Needleman. “Reddit Shares Soar in Long-Awaited IPO.” The Wall Street Journal, 21 March 2024, https://www.wsj.com/finance/stocks/reddits-stock-jumps-in-ipo-9b1536ee?page=1.
Fontana, Francesca. “The Score: Reddit, Apple, FedEx and More Stocks that Defined the Week.” The Wall Street Journal, 22 March 2024, https://www.wsj.com/finance/stocks/the-score-reddit-apple-fedex-and-more-stocks-that-defined-the-week-f8d19715?page=1.
Katzeff, Paul, and Davon Collins. “Upcoming IPOs: 10 Companies To Watch – Forbes Advisor.” Forbes, 21 March 2024, https://www.forbes.com/advisor/investing/upcoming-ipos/.
Ossola, Alex, and Sarah Needleman. What to Watch as Reddit Goes Public. 21 March 2024. The Wall Street Journal, https://www.wsj.com/podcasts/google-news-update/what-to-watch-as-reddit-goes-public/779a2355-e6f3-4c80-afdf-02fba22b9064?mod=Searchresults_pos1&page=1.
“Q1 2024 Capital Markets Watch.” PwC, https://www.pwc.com/us/en/services/consulting/deals/us-capital-markets-watch.html.
“Reddit, Inc.” United States Securities and Exchange Commission form S-1, 22 February 2024, https://www.sec.gov/Archives/edgar/data/1713445/000162828024006294/reddits-1q423.htm.
Reed, Lizzie. Why Today’s IPO Market May Surprise You. 28 March 2024. Goldman Sachs, https://www.goldmansachs.com/intelligence/podcasts/episodes/why-todays-ipo-market-may-surprise-you.html.
Roth DeClark, Kristen. “3 Themes Likely to Dominate Tech Dealmaking in 2024.” Barclays, 7 December 2023, https://www.ib.barclays/our-insights/3-point-perspective/3-themes-likely-to-dominate-tech-dealmaking-in-2024.html?cid=paidsearch-textads_google_google_themes_tech-trends_us_tech-trends_nonbrand_2326284777567&gad_source=1&gclid=CjwKCAjw_e2wBhAEEiwAyFFFo-iYc.
Savitz, Eric. “Reddit Stock Is an AI Play. Its CFO Explains.” Barron’s, 22 March 2024, https://www.barrons.com/articles/reddit-stock-ai-ipo-cfo-e8e7e376.