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

Reddit’s IPO plans are in the spotlight with the release of a new S-1 filing Monday morning that sets an initial price range for its stock at $31 to $34 per share.

If investors agree to pay the high-end price, its valuation should be around $5.4 billion. The lower end of that range is $31 billion, but based on an estimated 158.98 million shares outstanding, Reddit is worth $4.93 billion. Others have calculated the potential valuation at close to or above $6 billion, including options held by employees or others.

Regardless, given the pricing cues from its secondary market trading activity ahead of its IPO filing, everyone seems convinced it will become a public company worth $5 billion or more, sort of like Reddit’s Mendoza line.

With 2023 revenue of $804.0 million, Reddit is expected to trade between 6.9x and 8x revenue, depending on which valuation estimate you want to use. The multiple could be even larger if investors agree to raise the price above $34 per share after the roadshow.

This feels a bit pricey, given that Reddit is an unprofitable, long-standing social media company that relies on advertising. For example, unprofitable Snap is currently valued at 4.34 times its revenue, while more profitable Meta is valued at 9.86 times its trailing revenue, according to Yahoo Finance.

Reddit’s artificial intelligence game plan is a good reason why its stock price is closer to Meta than Snap.

Earlier this year, Reddit sold a $203 million contract to an artificial intelligence company to gain access to its data. According to the filing:

We are also in the early stages of monetizing 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 material licensing arrangements with an aggregate contract value of $203 million and terms of two to three years. We expect to recognize at least $66.4 million in residual revenue for the year ended December 31, 2024 and thereafter. Reddit data is constantly growing and updating as users interact with the community and each other. We believe our growing platform data will become a key element in leading large language model (“LLM”) training and serve as an additional monetization channel for Reddit.

Although the contract did not disclose the buyer, OpenAI CEO Sam Altman owns 8.7% of Reddit’s shares, making him the third largest shareholder. He also served on the company’s board of directors.

Reddit is a treasure trove of training data for the kind of large-scale language models that artificial intelligence companies have been craving, thanks to its long history, large user footprint, and active, crowdsourced creation of written material. Reddit has proven that it can wrest revenue from artificial intelligence companies in exchange for access to this treasure trove.

Indeed, some Reddit users care about artificial intelligence and the company as a pair, but those concerns likely won’t have much impact compared to the potential revenue Reddit sees from its data.

Investors may view Reddit as a side bet on artificial intelligence itself, even if the company’s core business is not creating artificial intelligence models. Reddit is accumulating new data by the hour. This is good for Reddit’s future.As the adage goes: If you want to get rich during the gold rush, become a seller Pickaxe and shovel.