Here’s how Reddit’s IPO could boost these 2 key businesses at Morgan Stanley
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Reddit’s public debut is not only a watershed moment for the social media company, but it also could deliver broad benefits for the Wall Street firm leading the multibillion-dollar deal: Club holding Morgan Stanley. On Thursday, Reddit will start trading on the New York Stock Exchange with a targeted valuation of around $6.5 billion . If the initial public offering is received positively by investors, this could boost Morgan Stanley’s investment banking business and over time its wealth management segment, too. The listing comes at a crucial time for the bank after it posted lackluster quarterly results earlier this year and shares underperform peers and the broader market. Morgan Stanley stock has dropped 2% year-to-date, compared with the KBW Bank Index ‘s more than 5% gains since the start of 2024. The portfolio’s other financial stock, Wells Fargo , is up 15% over the period. The S & P 500 has advanced 9.5%. Morgan Stanley’s weak 2024 stock performance was spurred by a post-earnings sell-off back in January. Investors were seemingly underwhelmed by the cautious macro commentary from newly installed CEO Ted Pick, who replaced James Gorman at the start of the year. Pick’s comments that operating margins for the bank’s wealth management division were likely going to consolidate in the mid-20% range over the near term also didn’t help the stock, even though he maintained confidence in achieving its 30% target down the road. The Club also was disappointed in the earnings release, but we’re hopeful leadership was lowering shareholder expectations to exceed them down the line. In any case, the Club trimmed some Morgan Stanley shares earlier this month after a curious single-session surge helped erase losses tied to its fourth-quarter results. MS .SPX YTD mountain Morgan Stanley’s 2024 stock performance compared with the S & P 500. Jim Cramer described Morgan Stanley’s recent performance — both in share price and quarterly earnings — as “horrendous,” citing “desultory management” over the past six months, a period that partially included Gorman’s efforts to pass the baton to Pick. This is exactly why Reddit’s IPO could be a nice reprieve for the Wall Street giant. “As shareholders of Morgan Stanley, we need this to work or a lot of whatever faith is left in the bank will dissipate.” Jim wrote in a recent column, adding that the IPO’s “success relies on how tightly Morgan Stanley conducts the deal.” Morgan Stanley is a lead underwriter for the IPO, meaning its bankers act as middlemen to help Reddit go from a private to a public company. Underwriters typically help structure the offering, including the number of shares to be issued and the initial price range for the stock. Goldman Sachs , JPMorgan and Bank of America are also lead underwriters for the process; it’s common for multiple banks to be involved. More dealmaking Morgan Stanley can benefit from Reddit’s stock debut in two main ways. First, its investment banking business earns a fee based on the amount of the offering and for selling shares to investors during the IPO. Although Reddit’s IPO is fairly large, it will not by itself move the needle for the Wall Street giant long term. Instead, Reddit’s debut should be viewed as a way to gauge investors’ appetite and the future of the broader dealmaking environment. After a boom during the Covid pandemic, IPO activity slowed dramatically after the Federal Reserve began hiking interest rates in March 2022. The higher borrowing costs brought on by those rate hikes and an uncertain economic environment have weighed on Morgan Stanley’s once-lucrative investment banking business. If shares of Reddit are well-received by the market, other private companies who have been waiting for the IPO market to rebound in earnest may look to go public — and possibly choose Morgan Stanley as a facilitator for their offerings. Even though its multiyear push into wealth management means it is less dependent on investment banking than it was a decade ago, this IPO could have far-reaching implications that boost a crucial lagging part of Morgan Stanley’s business. Reddit’s IPO also isn’t the only one Morgan Stanley is underwriting. Chipmaker Astera Labs , which on Wednesday jumped 72.5% in its debut on the Nasdaq, tapped Morgan Stanley’s investment banking services for its offering. A virtuous circle Morgan Stanley’s wealth management division may also benefit from more IPO activity. Once Morgan Stanley’s bankers conduct a public offering for a client, this can create a virtuous cycle that ultimately boosts net new assets for the wealth management business. Jed Finn, Morgan Stanley’s head of wealth management, explained how at recent a Bank of America conference. “Going from private to public starts a very important catalyst within the system,” Finn said at the event. “Our investment bankers execute the IPO. The client becomes a public equity admin client in our workplace business. Our [financial advisors] cover the individuals and the employees and the founders and the early investors.” He continued: “We add financial wellness programs to support the company as they broaden out their employee base. [Morgan Stanley Investment Management] manages the corporate cash. So, it creates a flywheel in our system that drives” net new assets. Morgan Stanley needs them. In a CNBC interview in January, CEO Pick reiterated the firm’s long-term goal of reaching $10 trillion in assets across wealth and asset management. But Morgan Stanley is still a ways off from hitting this goal, which was first laid out by Pick’s predecessor. The bank brought in $47 billion worth of net new assets in the fourth quarter, according to an earnings release . For the full year, Morgan Stanley brought in an additional $282 billion in assets, up 7% on an annual to bring its client assets to $6.6 trillion. Correction: This article has been updated to correct the spelling of Jed Finn’s name. (Jim Cramer’s Charitable Trust is long MS, WFC. See here for a full list of the stocks.) 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 . 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A trader on the floor of the NYSE with a Reddit T-shirt works after the opening bell as Reddit begins trading on the New York Stock Exchange (NYSE) in New York on March 21, 2024.
Timothy A. Clary | AFP | Getty Images
Reddit’s public debut is not only a watershed moment for the social media company, but it also could deliver broad benefits for the Wall Street firm leading the multibillion-dollar deal: Club holding Morgan Stanley.
