There’s nothing like a moribund IPO market to create a pleasant backdrop for a bull run. We’ve had some small biotech deals and the usual SPAC junk. But nothing big, seemingly for ages. Until Reddit. Its initial public offering — which will probably come at a $7 billion valuation and an odd price tag of $31 to $34 a share — requires people to buy shares in a social media company that has never made money. It’s been around for 19 years and it still hasn’t produced anything but adjusted EBITDA (earnings before interest, taxes, depreciation, and amortization), an alternative measure of financial performance that I will not recognize because it has lost money for too many of us. Reddit did post $804 million in revenue for 2023, a sizable 20% growth from the previous year. This will get some institutions interested in participating in the upcoming IPO and hopefully keep some of its larger investors, including the mercurial Sam Altman, CEO of OpenAI; Conde Nast parent Advance Magazine Publishers, a still thriving mostly print entity; and Tencent (go figure). Hot on the heels of the Reddit deal is the expiration of the IPO lockup period for Arm Holdings on March 12. Company insiders have been prohibited from selling shares of the British chipmaker since it went public in September, and I have no idea if there will be sellers of any size. Who knows with a company that sports a long-standing partnership with Nvidia ? But things loom when it comes to these matters. Reddit is a confusing deal. Employees will be able to sell stock on the deal, and some will sell given how long they have been around. It makes too much sense not to sell. But there could likely be buyers, perhaps the memesters, remnants of the GameStop era, and the options trading folk at Robinhood (another divine mystery). I do know this: If Reddit rallies, there will be others to follow. If it doesn’t, we could see a continuation of the lack of share supply, which is a function of endless buybacks that drive down the natural supply. You have to realize how important supply and demand can be to any market. Supply after the initial 60 to 90 days breeds a level of faux confidence and lack of rigor for all participants waiting for a ready source, usually chumps, to do some buying. I thought it might occur after the successful Arm deal, but like so many nascent attempts to revive the IPO market there was nothing worth following up with until the Reddit deal. I shudder to compare the two. Arm is an amazing company with first-class seasoned leadership and superior engineering. It’s run by Rene Haas, who could rival or beat most CEOs in tech, about as high a compliment as I can bestow. I have yet to find anyone who doesn’t love him. Maybe Reddit could be more like Instacart , which went public in September. The grocery delivery company said it made $2.5 billion in revenue in 2022, and $242 million in profit for the first half of 2023. Ads are incredibly lucrative and were responsible for $406 million in sales and a third of that profit. I kind of like the ad model. It works incredibly well for Amazon , Walmart and DoorDash . Maybe it will work for Reddit. Steve Huffman, Reddit’s well-compensated CEO — he made $193 million in 2023, according to the S-1 filing — isn’t as loved. While a co-founder of the company, he left it for six years before returning as chief executive. In some ways, Reddit reminds me of the old Etsy , which was initially run to the benefit of the community, but then came to be an actual business and remains one now. Reddit has to follow a similar path. This will be difficult given the fractious and at times unruly readership of more than 70 million people. It seems more of a message board than a business. However, the proliferation of ads in the last year, no doubt in preparation for the IPO, has been duly noted by a community that seems a tad communistic for my taste. Let’s see. There is an amorphous plan to reward monitors and Redditors with some stock. But if this deal is anything like one I did at TheStreet.com in 1999, I wouldn’t be so sure. At the time, I tried mightily to get stock for employees and readers but was dismissed by the bankers and the Securities and Exchange Commission. I may sound skeptical about this IPO, but that’s because its success relies on how tightly Morgan Stanley conducts the deal. It needs to produce a nice pop but not a huge one or it will open at its high, trade a little higher midday, and then begin the sickening slide lower that is reserved for money-losing companies — adjusted EBITDA, or otherwise. Those who want the bull to continue must root against this deal and bet that it fails to hold the opening. That will keep other companies at bay. But those who are pinning the hopes for a return of a vibrant IPO market on this deal have to rely on Morgan Stanley to be deft in its dish out. And that’s something that I am not sure it is capable of given the rusty nature of the market. Why does this placement matter so much? Because there are a ton of AI-related companies that need liquidity and there is no better time than the present to cash in if Reddit “works.” As shareholders of Morgan Stanley , we need this one to work or a lot of whatever faith is left in the bank will dissipate. Its performance in the last six months has been horrendous, due to desultory management. My bile shows because I hate losing money. The sustenance of this market comes from many different directions. We have some thriving healthcare, transportation, and industrial markets. The latter is built on endless buybacks coupled with infrastructure orders from various governments, but it’s nothing like the Nvidia-led tech bull market. We don’t want that rally to broaden simply because there is not enough money around. Investors, after all, can still earn 5% on the sidelines. Boy is that 5% a tricky godsend, given you could have made so much more by owning a basket of tech stocks. Without lots of new stock coming to the tape, the entire equity market feels like a sliver IPO, where only some of it trades. As long as that stays the case we know there is kind of a put underneath all stocks. We lose it, though, through six to seven weeks of actual sliver IPOs that generate mindless pops via engineered opening prices that favor the buyers or the sellers depending upon the clout of the CEO who runs the company. Most CEOs get taken to the cleaners because they have never brought deals public and are beholden to bankers who want to reward the Fidelitys of the world. (Fidelity is a shareholder of Reddit, but I don’t know how that will cut with allocations.) No one ever admits that they have been one-hour Martinized for fear of revealing themselves as bumpkins. But having brought a company public with TheStreet.com, I was astounded at how shabbily I was treated, and I was pretty informed on the process, having done a ton of syndicate work at Goldman Sachs and having run a hedge fund. The lords of finance are a potent force when it comes to this end of commerce. I go into some detail about this process only because we are coming out of earnings and they were surprisingly good to those who hadn’t done much homework. These folks love to opine or are addicted to Fed speak and don’t care one whit about anything other than aggregate earnings. I often think that these opiners like their status because it allows them both to do only a modicum of homework (they disdain getting their hands dirty with the nitty-gritty) while not having to select or discuss any individual stocks. Why were most people shocked at the earnings in aggregate? It is mostly because of the shallowness of the “beat and raise” formula for estimating how a company has done. If you create nothing but bogus estimates that can easily be beaten — with the help of management in offline discussions after earning calls — you are going to engineer upside surprises. That is, unless management is incompetent in producing 90 days’ worth of planned results, usually with more than a month already under the belt. The backdrop is benign because of unemployment and inflation. The sheer number of jobs created in this economy is breathtaking. The ability to raise prices is formidable. The addition of a shadow economy of 8 to 10 million immigrants, legal or otherwise, is a positive for both sales — bolstered by desperate city and state governments — and earnings, boosted by employers joyously ignoring the rules about hiring these people, no doubt spurred by a lack of ICE enforcement. Sometimes I wish I didn’t know so much of this but I learned my lessons by owning a couple of restaurants and watching enforcement for fear of investigation because of my admittedly high profile. Those who looked the other way were able to get away with minimum wages. The rest of us trawled everywhere for $ 21-an-hour dishwashers. If you were doing okay, or if you were a dabbler, it didn’t hurt the bottom line all that much. Otherwise, it sunk you because of the narrow profit margins of all but the most successful entities. Everything works when you have robust employment. We know now that housing can stay ridiculously hot given how intelligent the builders are and how much of the new home market is sought after by people who don’t need to work at the office every day and want to flee the cities for better public schools — a sadly universal problem. Autos stay strong because of the importance of private transit versus spotty public transit, not made up for by Uber or Lyft . Retail can keep succeeding, led by Walmart, Amazon, and Costco , three beauties with obviously terrific stocks. Travel and leisure rely on those who have excess savings and bountiful credit. These all go away, of course, when job creation diminishes. But only a handful of companies have committed to efficiency and only Bed Bath and Rite Aid have filed bankruptcy, with the former doing an unusual liquidation. In that environment, it’s hard not to do well both in earnings and in stock prices. Tech? All I can say is this moment marks the conversion of the non-believers into believers, an enjoyable kicking-and-screaming process for those of us who have been captivated by the wonders of generative AI for years now. AI might as well stand for “astounding income” for those companies that know how to use it, led by Microsoft , Meta Platforms , and Amazon . This brings me back to the IPO market. Other than getting a too-hot employment number this Friday (and lots of attendant authentic Fed speak gibberish about when the central bank will cut rates) there’s not much that can derail the bull. We aren’t overbought, we have nothing in the way of earnings that can be shocking. Do we still care about Target ‘s numbers? And we have an election year where the sitting president can always find something to please a portion of the electorate, like the profligate, albeit pleasing, way that that student loans are forgiven. You can see the populist juices flowing from members of both parties in the down ticket, too. All of it matters. Much of it flows to savings. Some of it flows to stocks. A goodly amount seems to go into crypto with no sellers in sight. But if Reddit works, that will toss the window wide open between now and the summer, and the brokers need it. There’s plenty of M & A out there, but the Federal Trade Commission will be sure to make one last stand for fear of a change at the White House in November. Under these circumstances, the atmosphere can only be described as benign. That’s enough to continue the improbable rally that has gone on since the November Fed pivot, the last time the Fed mattered despite the chatter otherwise. I like to say “enjoy” it because when things are bad they are very bad. They aren’t. Enjoy it. (See here for a full list of the stocks in Jim Cramer’s Charitable Trust.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust’s portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.
There’s nothing like a moribund IPO market to create a pleasant backdrop for a bull run. We’ve had some small biotech deals and the usual SPAC junk. But nothing big, seemingly for ages.
Read the full article here
News Room
