Reddit’s IPO plans come into focus with a new S-1 filing that was released Monday morning and sets an initial price range for its stock at $31 to $34 per share.
If investors agree to pay its high range, its valuation will reach about $5.4 billion. At the low end of that range, $31 billion, though Reddit would be worth $4.93 billion based on the expected 158.98 million shares outstanding. Others have estimated a potential valuation closer to or above the $6 billion threshold including options held by employees or others.
In any case, everyone seems to think it will emerge as a public company at or above $5 billion, something like Mendoza line for Reddit, given indications of its secondary market trading activity at pre-IPO pricing.
With revenues of $804.0 million in 2023, Reddit is on track to trade at a multiple of 6.9 to 8 times its earnings, depending on which valuation estimate you want to use. And that multiple could be even higher if investors agree to go higher than the $34 per share range after the roadshow with them.
Given that Reddit is an unprofitable, long-standing social media company that depends on advertising, this seems a little pricey. The unprofitable Snap, for example, is currently worth 4.34 times its earnings, while the highly profitable Meta is worth 9.86 times its own trailing earnings, according to Yahoo Finance.
Reddit’s AI game plan is a good reason why it’s pricing its stock closer to Meta than Snap.
Reddit sold $203 million worth of contracts to artificial intelligence companies to access its data earlier this year. According to the filing:
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 arrangements with an aggregate contract value of $203.0 million and terms ranging from two to three years. We expect that at least $66.4 million of revenue will be recognized during the year ending December 31, 2024 and the balance thereafter. Reddit’s data is constantly growing and regenerating as users come and interact with their communities and each other. We believe our platform’s growing data will be key to training leading large language models (“LLM”) and will serve as an additional monetization channel for Reddit.
While this did not reveal the buyer in such a contract, OpenAI CEO Sam Altman has a 8.7% share on Reddit, making it the third largest shareholder. He was also once a member of the company’s board of directors.
Reddit is a treasure trove of exactly the kind of training data ever-hungry, big AI language companies need thanks to its long history, massive user footprint, and active crowd-sourced content creation. And Reddit has already proven it can extract revenue from AI companies in exchange for access to that crowd.
It’s true that some Reddit users they are troubled about AI and the company as a couple, but those concerns may not weigh much compared to the potential revenue unlock Reddit could see from its data.
Investors might consider Reddit a secondary bet on AI itself, even if the company’s core business isn’t building AI models. And Reddit gathers new data every hour. This bodes well for the future of Reddit. As the saying goes: If you want to get rich in a gold rush, be the one selling picks and shovels.
