Reddit's IPO plans are focusing on a new S-1 filing published that sets an initial price range for its shares of $31 to $34 per share.
If investors agree to pay its high end, its valuation should reach around $5.400 billion. At the lower end of this range, $31 billion, although Reddit would be worth $4,93 billion based on the expected 158,98 million shares outstanding. Others have calculated a potential valuation close to or higher than the 6 billion dollar mark including options held by employees or others.
In any case, everyone seems to believe that it will emerge as a public company at a valuation of approximately $5.000 billion or above, as a Mendoza Line for Reddit, given the clues its secondary market trading activity showed about prices ahead of its IPO filing.
With $804,0 million in revenue in 2023, Reddit is on track to trade for a multiple of 6,9 to 8,0 times its revenue, depending on which valuation estimate you want to use. And this multiple could be even higher if investors agree to break out of the $34 per share range after their tour with them.
Given that Reddit is a long-established and unprofitable social media company, and dependent on advertising, it seems a bit expensive. Unprofitable Snap, for example, is currently worth 4,34 times its revenue, while highly profitable Meta is worth 9,86 times its own trailing revenue, according to Yahoo Finance.
Reddit's game plan for AI is a good reason why it's pricing its stock closer to Meta than Snap.
Reddit sold contracts worth $203 million to AI companies to access their data earlier this year:
«We are also in the early stages of monetizing our emerging data licensing opportunity. by allowing third parties to access, search and analyze data on our platform. In January 2024, we entered into certain data licensing agreements valued at $203 million. and terms ranging from two to three years. We expect a minimum of $66,4 million of revenue to be recognized during the year ending December 31, 2024 and the rest from then on. Reddit data constantly grows and regenerates as users interact with their communities and each other. “We believe data from our growing platform will be a key element in training leading large language models (LLMs) and will serve as an additional monetization channel for Reddit.”
While this did not reveal the buyer in said deal, OpenAI CEO Sam Altman has a 8,7% engagement on Reddit, making it the third largest shareholder. He was also a member of the company's board of directors.
Reddit is a treasure trove containing exactly the kind of training data that ever-hungry large language model AI companies need thanks to its long history, enormous user footprint, and active, collaborative creation of written material. And Reddit has already proven that it can extract revenue from companies Artificial Intelligence in exchange for access to this treasure.
It is true that some Reddit users they are worried about AI and the company as a contributor to it, but those concerns may not have much influence compared to the potential revenue Reddit could unlock from its data.
Investors could consider Reddit as a side bet to AI itself, even if the company's core business is not creating AI models. And Reddit accumulates new data every hour. That's good for the future of Reddit. As the axiom goes: if you want to get rich during a gold rush, sell picks and shovels.
