Reddit at $5B seems eminently reasonable
The collapse of Amazon’s proposed deal to buy iRobot highlights just how critical the IPO market is this year. With governments tightening the screws on Big Tech companies trying to buy smaller firms, a key exit avenue could be closed to startups in the near term.
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If mergers and acquisitions are harder to pull off, especially for Big Tech companies that sometimes prefer to buy new tech over building it, unicorns and other late-stage startups will have precious few paths to liquidity available to them apart from going public. That fact makes Reddit feeling out its own IPO valuation all the more important. What could help tech companies avoid another 2023 (a year that had precious few public debuts) is a massive, winning public offering.
To accomplish that, Reddit needs to price its offering very carefully. Too low a price, and any positive trading results that follow could be marked as more artificial than material. Too high, and the stock could lose ground from its IPO price.
But private tech companies want good IPO news that sticks, and public market investors won’t gain confidence if Reddit clears a bar that it set too low. However, if the price is too high, Reddit’s post-IPO performance may scare companies off if it can’t keep up. We saw last year how much post-IPO trading performance can impact other companies’ decisions to go public — when Instacart failed to hold on to gains after pricing at $30 per share, other tech companies took note. Today, Instacart is worth a little more than $25 per share.
Bloomberg reports that Reddit is looking at a valuation of “at least $5 billion.” That’s about half its price tag of $10 billion from 2021, but it is still a large exit all things considered.
A couple weeks ago, we learned that Reddit reportedly generated $800 million in ad-based revenue in 2023, up 20% from a year earlier. For reference, in Q3 2023, Meta’s revenue increased 23% year-over-year, while Snap managed a smaller 5% gain. We can learn a lot from those data points:
Meta’s business is huge, and massively profitable. It turned revenue of $34.1 billion into operating income of $13.8 billion in Q3 2023. That’s an operating margin of 40%, which is wild. The company is worth 8.2x its trailing revenue, per YCharts.Snap’s revenue came to $1.2 billion in the third quarter, leading to a net loss of $368 million, along with negative free cash flow and falling adjusted profitability. The company is worth 5.7x its trailing sales, per YCharts.
So using Reddit’s $800 million ads-based revenue, at a $5 billion valuation, the company’s trailing multiple works out to 6.25x and expands to 7.5x at a $6 billion valuation.
Presuming that Reddit is less unprofitable than Snap, it would be reasonable to argue that Reddit’s revenue multiple could be between what Snap and Meta each command. But given how profitable Meta is, Reddit’s (back of the envelope math rules!) revenue multiple at $5 billion makes more sense than it does at $6 billion.
A word of warning: It would be very simple to look at the numbers above and say, “Hey, Reddit seems healthier than Snap, so it should have a higher revenue multiple. Ergo, it’s fine.” But looking at the very modest gap between Meta’s and Snap’s price-sales multiples leaves me feeling like one of them is off. Either Meta is too cheap or Snap too expensive; their multiples are just too close given their diverging financial realities. It’d be easy to plonk Reddit between them, but one of the two data points we have feels suspect, so I’d recommend staying cautious.
More when we get our hands on the S-1 filing, and then we will watch Reddit like hawks. Can this IPO set a positive tone for other large and private tech companies? Hundreds of founders, investors and billions of dollars are waiting to find out.
