Tall Order: Bulls Hope Reddit’s Fledgling Stock Will Lift the IPO Curse

Social media site Reddit Inc. is poised to go public, raising a potential $750 million, the first tech company to do an initial public offering this year. Bullish dealmakers hope it is a harbinger of a turnaround in the IPO slump.

Reddit, a message board website with an ardent user base, may be the spark that Wall Street has been waiting for to cure the IPO malaise, wrote Brianne Lynch, head of market insight at EquityZen, a trading platform for privately held shares in firms usually eyeing a public listing. “A lot of companies are waiting for one company to go out and have this blockbuster IPO, and then that will encourage others to follow,” she commented.

In its filing Monday, Reddit set a share price range of $31 to $34, aiming to raise as much as $750 million. The IPO likely will take place before the end of March. Like many young tech outfits, Reddit—founded in 2005—is in the red, although in 2023, it halved losses from the year before, to $91 million.

Reddit does have some factors in its favor, as it was the go-to forum for young stock aficionados during the 2021 meme stocks craze. The hope is that these enthusiasts will fuel a strong showing for Reddit stock once it goes public.

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Loyal Redditors, as users are known, will be able to buy shares at the offering price right before the stock goes public, an advantage normally reserved for big backers. Among existing bigshot investors: artificial intelligence star and OpenAI CEO Sam Altman, who holds a private stake in the firm, which will be around 7% once the stock goes on sale.

In general, the public offering picture is not inspiring. Thus far in 2024, there have been only 33 IPOs. For the first three months of 2023, 44 companies had gone public. The IPO recovery has sputtered this decade. The record for the 21st century is 2021’s 1,035 offerings. That total dwindled to 181 in 2022, then to 154 in 2023.

But it remains to be seen whether Reddit will have the bang-up debut that will lift the IPO market’s curse. Lynch pinpointed three highly lauded 2023 IPOs that failed to light a broader fire: Instacart, Birkenstock and Arm .

Grocery delivery service Instacart (IPO funds raised: $660 million), formally known as Maplebear Inc., slumped to two-thirds of its September 2023 offering price before it rallied in just the last few weeks with the market’s overall surge. Instacart is currently up 15% from its October 2023 launch.

German shoemaker Birkenstock Holding ($1.5 billion) fell 13% in the first day of its October 2023 opening. Then it inched north and sits just $1 above its offering price. Shoe sales were helped by the blockbuster film “Barbie,” where Margot Robbie, in the title role, wore a pair of pink Birkenstocks. The product-placement movie scene had no detectable influence on the company’s stock situation, though.

British chip designer Arm Holdings ($5.2 billion) traded down for the first half of its six months in the public market before at long last taking wing a month ago on the artificial intelligence updraft. Since early February, it has soared to double its IPO price. It is 90% owned by parent SoftBank Group, the Japanese conglomerate.

“Reddit is a platform that really gave a big voice to the retail investor during the whole meme stock frenzy,” strategist Lynch wrote, adding that this group possibly could lift Reddit stock to solid gains. On the other hand, a lot of their pet meme stocks crashed and burned.

Tax Increases

The budget proposal includes reforming “tax-preferred retirement incentives to ensure that the ultrawealthy cannot use these incentives to amass tax-free fortunes.” This is likely a reference to mega backdoor Roth conversions, in which a saver can convert 401(k) investments into a Roth individual retirement account or Roth 401(k) if the feature as available.

A budget table published by the Department of the Treasury noted the proposal would “prevent excessive accumulations by high-income taxpayers in tax-favored retirement accounts and make other reforms.” It estimated that the proposal would generate almost $7 billion in tax revenue in 2025, $23.7 billion over 10 years.

The president’s budget would also eliminate the carried interest loophole, which, according to the proposal, “allows wealthy investment managers to pay a 20 percent rate on the pay they receive for managing fund assets, instead of the current 37 percent rate that comparable wage earners pay.”

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Taxing carried interest as income rather than as capital gains would raise about $6.5 billion over 10 years, according to the Treasury’s budget table.

The budget also calls for the stock buyback tax to be increased to 4% from 1% in what the administration called a “surge in corporate stock buybacks” after tax cuts made during the administration of former President Donald Trump. The proposal would also raise the minimum income tax for billionaires to 25%, up from what the Biden administration claims is an average tax rate of 8%, according to the administration, after tax preferences—that number is based on a hypothetical situation in which unrealized stock market gains were taxed each year, rather than only being taxed when the stock is sold.

Meanwhile, large corporations would pay more as well, with the corporate tax rate going up to 28%, while setting a minimum of 21% for billion-dollar companies in income taxes.

“President Biden believes large corporations should pay their fair share and is committed to reversing the massive tax giveaway to big corporations that Republicans enacted in 2017,” the administration wrote.

Social Security

The budget proposal stated that “The President opposes any proposal to cut benefits, as well as proposals to privatize Social Security” and proposed a 9% increase to the Social Security Administration’s operating budget so the agency can improve its customer service.

The Biden administration also suggested that the president might support increasing or even removing the cap on income subject to Federal Insurance Contributions Act taxes—currently $168,600—to help fund Social Security, though the proposal does not explicitly say this: “Currently, middle-class and lower-income Americans pay Social Security taxes on all of their earnings, but higher-income Americans do not. That’s not fair. The President believes that protecting Social Security should start with asking the highest-income Americans to pay their fair share.”

The budget tees up a debate about Social Security funding and administration during the presidential election in 2024. On Monday, presumptive Republican nominee Trump was asked how he would handle Social Security, Medicare and Medicaid on CNBC’s Squawk Box. He responded that, “there is a lot you can do in terms of entitlements in terms of cutting and in terms of also the theft and the bad management of entitlements—tremendous bad management of entitlements.”

The former president added that, when it comes to the Biden administration, “I know that they’re going to end up weakening Social Security, because the country is weak.”

Biden later responded on a social media post on X, the platform formerly known as Twitter: “not on my watch,” in reference to the remarks about cuts to Social Security.

Medicare

The administration is also seeking tax increases to help fund Medicare.

The budget proposal would “modestly increase the Medicare tax rate on income above $400,000,” the administration wrote.

It would also seek to close “loopholes” for high-paid professionals and wealthy business owners to avoid the tax, and it would direct all Medicare tax revenue into the Medicare Hospital Insurance Trust Fund, with the goal of extending “the life of the Medicare HI Trust Fund,” the administration wrote.

The plan is before Congress, but unlikely to get any movement, particularly in the Republican-controlled House, which will offer its own spending plans for 2025. Meanwhile, the government will need to work through spending needs for the current year, as a continuing resolution is set to expire on March 22.

Tags: stock buyback