Reddit's IPO Share Price Analysis: High Valuation Explained by AI Revenue Insights

Reddit is gearing up for its public debut, as indicated by its newly released S-1 filing. The document outlines an initial stock price range of $31 to $34 per share. If investors lean toward the upper end, Reddit's valuation could reach approximately $5.4 billion. Even at the lower end, with shares priced at $31, the company's worth would stand around $4.93 billion, based on an anticipated 158.98 million shares outstanding. Some analysts suggest that factoring in employee stock options could push the potential valuation closer to or even above $6 billion.

There’s a general consensus that Reddit will emerge as a public company with a valuation of at least $5 billion, which seems to be a critical threshold for the platform, especially given insights from its secondary-market trading before the IPO filing.

With projected revenue of $804 million for 2023, Reddit's trading multiple hovers between 6.9x and 8x its revenue, depending on the valuation approach taken. Should investor interest push the share price above $34 during public roadshows, this multiple could further increase. However, considering Reddit's status as an unprofitable, long-established social media platform reliant on advertising, these multiples appear somewhat high. For context, Snap, which is also unprofitable, currently trades at a multiple of 4.34x its revenue, while the highly profitable Meta boasts a multiple of 9.86x its trailing revenue, according to Yahoo Finance.

One compelling reason behind Reddit’s pricing strategy, which leans closer to Meta than Snap, is its ambitious plans in the realm of artificial intelligence. Earlier this year, Reddit struck contracts valued at $203 million with AI firms for access to its extensive data. According to the filing:

"We are also at the early stages of monetizing our emerging opportunity in data licensing by allowing third parties to access, search, and analyze data on our platform. In January 2024, we entered into data licensing agreements with a total contract value of $203 million, with terms spanning two to three years. We anticipate recognizing at least $66.4 million in revenue during the year ending December 31, 2024, with the remainder following thereafter. Our data is continuously growing and regenerating as users interact within their communities. We believe this growing platform data will be instrumental in training leading large language models (LLMs) and serve as an additional revenue stream for Reddit."

Although the filing does not disclose the specific buyer behind these contracts, it's noteworthy that OpenAI CEO Sam Altman, who formerly served on Reddit's board of directors, holds an 8.7% stake in the company, making him its third-largest shareholder.

Reddit offers a wealth of training data that is highly sought after by large language model AI companies, thanks to its long-standing presence, expansive user base, and collaborative content development. The platform has already proven capable of generating significant revenue from AI companies eager to access this invaluable resource.

While some Reddit users harbor concerns about AI’s implications for the platform, these worries may be overshadowed by the potential revenues that Reddit could unlock through data monetization. Investors may view Reddit as a strategic investment in the AI sector, even if the company is not directly involved in developing AI models. With a continuous influx of new data, Reddit's future remains promising. As the saying goes: those looking to profit during a gold rush should consider supplying the picks and shovels.