What to Expect as Reddit Enters the S&P 500: Insights for Investors

Key Points

• S&P Dow Jones Indices announced that Reddit will replace AvalonBay Communities in the S&P 500 index before the market opens on Tuesday, August 18, 2023.

• Reddit’s revenue has grown over 60% year over year for eight consecutive quarters, reaching $2.8 billion in the trailing 12 months.

• Amid the index announcement, Reddit shares surged approximately 13% in trading on August 15, 2023, closing near $179.

With AvalonBay Communities being acquired by Equity Residential, Reddit’s inclusion marks a significant shift for both the index and the company. Despite the positive response to the index announcement, historical data indicates that the average abnormal return for new S&P 500 additions has decreased from 7.4% in the 1990s to less than 1% in the 2010s, according to research from Harvard Business School.

Reddit trades at roughly 40 times its earnings, reflecting investor expectations of continued growth. However, recent concerns have arisen regarding its search referral traffic, which primarily depends on Google, potentially impacting its user engagement and growth trajectory.