Why Reddit Stock Is Up After Hours: RDDT Is Joining the S&P 500
By Brian McCormick ·
Reddit shares jumped roughly 10% after hours Thursday after S&P Dow Jones Indices announced that the social media company will join the S&P 500 next week.
Reddit stock is trading around $173 after hours, up roughly 10% from its $158.12 regular session close. The stock had already gained about 3% during Thursday's trading session before the index announcement arrived.
S&P Dow Jones Indices announced Thursday evening that Reddit will be added to the S&P 500 before trading opens on Tuesday, August 18. Reddit will replace AvalonBay Communities, which is being acquired by existing S&P 500 member Equity Residential. The combined real estate company will remain in the index under a new name, leaving Reddit to fill the opening.
The explanation for the after hours move is fairly straightforward. Joining the S&P 500 creates a new source of demand for Reddit shares.
Why joining the S&P 500 moves Reddit stock
An S&P 500 addition changes the shareholder base.
Trillions of dollars are invested in products that track or benchmark themselves against the S&P 500. When Reddit enters the index, funds designed to replicate it need exposure to RDDT so their portfolios continue matching the benchmark.
The mechanics look something like this:
- Reddit enters the S&P 500
- Index funds need to own Reddit
- Funds buy shares
- Near term demand for RDDT increases
There is also a deadline. Reddit officially joins before the market opens August 18, so index tracking portfolios need to adjust their positions around the effective date.
Investors know those purchases are coming, which gives other buyers an incentive to move first. The after hours rally is essentially the market pricing in that expected demand before the index change actually takes effect.
This is why an S&P 500 addition can move a stock sharply even though nothing inside the underlying business changed that day.
Reddit finally gets its S&P 500 spot
Reddit had recently been considered a candidate for another opening in the index.
When Electronic Arts left the S&P 500 earlier this month, Reddit was among the companies viewed as potential replacements. S&P ultimately selected Ferguson Enterprises instead, and Ferguson shares jumped more than 9% after hours following that announcement.
Another opening appeared quickly when the AvalonBay acquisition created a vacancy. This time Reddit got the spot.
It is also a notable milestone for a company that only went public in March 2024. In roughly two and a half years, Reddit has gone from a newly public social media platform to a member of the S&P 500.
That milestone carries some prestige, but it is not the main reason shares are jumping tonight. The more immediate force is the buying required from funds that track the index.
Does S&P 500 inclusion change the Reddit investment thesis?
Fundamentally, not much.
Being added to the S&P 500 does not increase Reddit's daily active users, make advertisers spend more money, improve its ad targeting or increase the value of its data licensing agreements. Those are still the things that will determine what the business is ultimately worth.
S&P 500 inclusion instead changes who needs to own the stock. Reddit is entering one of the most widely tracked investment benchmarks in the world, bringing RDDT into portfolios that previously had no requirement to hold it.
I would not look at a roughly 10% after hours jump and conclude Reddit's intrinsic value suddenly increased by 10%. Most of this is better understood as a one time ownership adjustment as the market prepares for a predictable wave of new buyers.
The longer term Reddit thesis remains tied to how quickly advertising revenue grows, how effectively the company monetizes its user generated data, whether Reddit Answers and search become meaningful businesses, user growth, and how efficiently that growth turns into earnings and free cash flow.