Reddit's planned IPO share price seems high, unless you look at its AI revenue

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

If investors agree to pay its high-end range, its valuation should hit around $5.4 billion. At the low end of this range, $31 billion, though Reddit would be worth $4.93 billion based on an expected 158.98 million shares outstanding. Others have calculated a potential valuation of closer to, or over, the $6 billion mark by including options held by employees or others.

In any case, everyone seems to believe it will emerge as a public company at or above the $5 billion mark, something of a Mendoza Line for Reddit, given the clues its secondary-market trading activity showed on pricing prior to its IPO filing.

With $804.0 million in 2023 revenue, Reddit is on track to trade for a multiple of 6.9x to 8x its revenue, depending on the valuation estimate you want to use. And this multiple could be even bigger if investors agree to go higher than the $34-per-share range after its roadshow with them.

Given that Reddit is an unprofitable, long-established social media company, and one that depends on advertising, that feels a tad expensive. Unprofitable Snap, for example, is currently worth 4.34x its revenues while highly profitable Meta is worth 9.86x its own trailing revenues, according to Yahoo Finance.

Reddit's game plan for AI is one good reason why it's pricing its shares closer to Meta than Snap.

Reddit sold $203 million worth of contracts to AI companies for access to its data earlier this year. Per the filing:

We are also in 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 certain data licensing arrangements with an aggregate contract value of $203.0 million and terms ranging from two to three years. We expect a minimum of $66.4 million of revenue to be recognized during the year ending December 31, 2024 and the remaining thereafter. Reddit data constantly grows and regenerates as users come and interact with their communities and each other. We believe our growing platform data will be a key element in the training of leading large language models (“LLMs”) and serve as an additional monetization channel for Reddit.

While this didn't reveal the buyer in such a contract, OpenAI CEO Sam Altman has an 8.7% stake in 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 always-hungry, large language model AI companies need thanks to its long history, huge user footprint, and active, crowd-sourced creation of written material. And Reddit has already proven that it can rip revenues out of AI companies in exchange for access to this trove.

True, some Reddit users are concerned about AI and the company as a pair, but those concerns might not hold much sway compared to the potential revenue unlock that Reddit could see from its data.

Investors might consider Reddit a side bet on AI itself, even if the company's core business isn't creating AI models. And Reddit is accumulating new data by the hour. That's good for Reddit's future. As the axiom goes: If you want to get rich during a gold rush, be the one selling picks and shovels.