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Reddit's planned IPO stock price looks high without AI revenue

TechBrunchBy TechBrunchMarch 11, 20243 Mins Read
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Reddit's IPO plans are coming into focus in a new S-1 filing released Monday morning, setting an initial price range for the company's stock at $31 to $34 per share.

If investors agree to pay that top price range, its valuation should reach about $5.4 billion. The lower end of this range is $31 billion, but based on the expected 158.98 million shares outstanding, Reddit would be worth $4.93 billion. Some companies estimate that their potential valuations, including options held by employees and others, could be close to or exceed $6 billion.

In any case, everyone seems to believe that the company will emerge as a public company at the $5 billion-plus level, given the clues secondary market trading activity has shown to pre-IPO filing pricing, making Reddit is like the Mendoza line.

Reddit is expected to have $804 million in 2023 revenue and trade at a multiple of 6.9x to 8.0x that revenue, depending on the valuation used. And that multiple could get even higher if investors agree to move beyond the $34 per share range after the roadshow.

Considering Reddit is a long-established social media company with low profitability and relies on advertising, this feels a bit expensive. For example, unprofitable Snap is currently worth 4.34 times its revenue, while highly profitable Meta is worth 9.86 times its bottom line, according to Yahoo Finance.

Reddit's strategy for AI is one good reason why the company's stock price is closer to Meta than Snap.

Earlier this year, Reddit sold contracts worth $203 million to an AI company for access to data (emphasis added).

We are also in the early stages of monetizing new data licensing opportunities by allowing third parties to access, search and analyze data on our platform. In January 2024, we entered into certain data license agreements with a total agreement amount of $203 million and a term of two to three years. The Company expects to recognize at least $66.4 million in revenue during the year ending December 31, 2024 and the remainder of the period thereafter. Reddit data constantly grows and regenerates as users interact with the community and with each other. We believe that our growing platform data will become a key element in training leading large-scale language models (“LLMs”) and serve as an additional monetization channel for Reddit.

The buyer of these deals has not been disclosed, but OpenAI CEO Sam Altman owns 8.7% of Reddit stock, making him the company's third-largest shareholder. He was also previously a member of the company's board of directors.

Thanks to its long history, massive user footprint, and aggressive crowdsourced documentation, Reddit is a treasure trove of training data needed by ever-hungry large language model AI companies. And Reddit has already proven that it can extract revenue from AI companies in exchange for access to this treasure trove.

To be sure, some Reddit users have concerns about AI and the company pairing it up, but those concerns may be less impactful than the potential revenue locked up that Reddit sees from its data. not.

Even if the company's core business isn't creating AI models, investors may see Reddit as a side bet on AI itself. And Reddit accumulates new data every hour. That's good for Reddit's future. As the saying goes, if you want to get rich during the gold rush, be the guy who sells picks and shovels.



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