Reddit’s planned IPO share price seems high, until you look at its AI revenue

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Reddit’s IPO plans are coming into focus with a new S-1 filing released Monday morning that sets an initial price range of $31 to $34 per share for its stock.

If investors agree to pay his high-end cap, he should be worth around $5.4 billion. At the low end of that range, $31 billion, though Reddit would be worth $4.93 billion based on an estimated 158.98 million shares outstanding. Others have calculated a potential value closer to the $6 billion mark or higher by adding options held by employees or others.

In any case, everyone thinks it will emerge as a public company at or above the $5 billion mark, akin to the Mendoza line for Reddit, given indications that its secondary market The trading activity was reflected in the pricing prior to its IPO filing.

With $804.0 million in 2023 revenue, Reddit is on track to trade at a multiple of 6.9x to 8.0x its earnings, depending on which estimate you want to use. And that multiple could be even higher if investors agree to go beyond the $34 per share range after a roadshow with them.

Given that Reddit is a non-profit, long-established social media company, and one that depends on advertising, that feels a little expensive. For example, unprofitable Snap is currently worth 4.34x its earnings, while highly profitable Meta is worth 9.86x its own earnings, according to Yahoo Finance.

Reddit’s game plan for AI is a good reason why it has priced its shares closer to Meta than to Snap.

Reddit sold $203 million worth of contracts to AI companies to access its data earlier this year (emphasis added):

We are also in the early stages of monetizing our emerging opportunities in data licensing. 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 of two to three years. We expect to recognize at least $66.4 million in revenue during the year ending December 31, 2024. And the rest after that. Reddit data constantly grows and regenerates as users visit and interact with their communities and each other. We believe our growing platform data will be a key factor in training leading language models (“LLMs”) and serve as an additional monetization channel for Reddit.

Although he did not disclose the buyer in such a deal, OpenAI CEO Sam Altman owns 8.7 percent of Reddit, making him 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 that ever-hungry, big language model AI companies need thanks to its long history, large user base, and active, crowd-sourced creation of written content. And Reddit has already proven that it can siphon off revenue from AI companies in exchange for access to that treasure trove.

True, some Reddit users are worried About AI and the company as a couple, but these concerns pale in comparison to the potential revenue unlocks Reddit can see from its data.

Investors may consider Reddit itself a side bet on AI, even if the company’s core business isn’t building AI models. And Reddit is collecting new data by the hour. This bodes well for the future of Reddit. As the adage goes: If you want to get rich during a gold rush, be a seller. Picks and shovels.

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