Top Tech IPOs to Buy in June

Initial public offerings (IPOs) generate a lot of attention on Wall Street and among individual investors, but they're generally best avoided.

IPOs, especially the more high-profile ones, often soar on their first day, but in the long run, most IPOs don't perform so well. One study found that three years after listing, nearly two-thirds of IPOs underperform the market. S&P 500 Large companies and Russell 2000 Most of them (among the smaller ones) are missing market returns by more than 10%.

That makes sense, since newly listed companies are competing with established companies, many of which are unprofitable and unproven.

But this data point shouldn't dissuade you from investing in IPOs entirely. After all, almost all blue chip stocks start out as an IPO, and investors who bought in soon afterward are likely to have higher returns than others. In other words, IPO stocks offer the potential for multiple returns not typically seen in blue chip stocks.

One recent IPO shows signs of bucking past trends for new issuance. Reddit (RDDT -2.33%)The social media asset went public in March.

Image source: Getty Images.

Reddit’s Competitive Advantage

Founded in 2005, Reddit has long been something of a counterculture social media network. Users remain anonymous, and the site is not as monetized as Reddit. Meta Platform Properties like Instagram and Facebook have the following features:

Reddit GameStop It created a short squeeze in 2021 and introduced many people to the power of the platform.

Reddit had never turned a profit at the time of its IPO and its growth was relatively modest for a tech stock. It expects revenue to grow 21% to $804 million in 2023, but now that it's public, the company has even bigger plans.

The company benefits from its own social media platform – with over 100,000 “subreddits” – communities that create their own discussions and comment threads, providing Reddit with a vast archive of content – as well as a passionate and loyal user base that grew 37% to 82.7 million daily active unique users (DAUs) in the first quarter, and is ramping up efforts to monetize that user base through advertising.

Reddit also has its own revenue streams thanks to its broad content base that touches on thousands of different subjects. The company is building relationships with artificial intelligence (AI) platforms that are using its content to train large-scale language models. For example, in early May, Reddit announced a partnership with OpenAI to bring ChatGPT content to its platform and new products. Reddit also plans to leverage OpenAI's technology for new AI-powered features.

Reddit's content was also featured in Google Search's new AI overview, showcasing the value of its large database in an era of new technology.

Reddit is at a turning point

Reddit's first-quarter revenue accelerated 48% to $243 million, driven by advertising growth and the rise of its data-licensing business. The company reported first-quarter adjusted EBITDA of $10 million, a significant improvement from a loss of $50.2 million in the same period last year.

The company also reported free cash flow of $29.2 million and a 500 basis point increase in gross margins to 88.6%, indicating that the direct input costs of running the website are minimal and that controlling overhead costs such as research and development and sales and marketing could help Reddit become more profitable.

As revenue growth accelerates and profitability expands, Reddit is starting to look like a very different business than it has been for most of its history. Its shares are up nearly 50% from its IPO price, but there may be room to go even higher if the company can maintain its current momentum.

If you're looking for a unique way to capitalize on the AI ​​boom, Reddit could find great success through its partnership with OpenAI and Google's parent company. alphabet settlement.