Reddit recently filed its S-1 and is gearing up to become the first venture-backed public listing of 2024. The success of Reddit’s IPO could set the stage for other late-stage startups waiting to go public. However, getting the valuation right is crucial for Reddit to make a mark.
Investors investing in the IPO seek growth potential, so Reddit needs to strike a balance in pricing to attract interest without undervaluing its shares. Pricing too high initially could deter potential buyers and lead to a decrease in the stock value post-IPO.
So, what should be Reddit’s target price? According to secondary investors, aiming for a valuation of $5 billion or less could position Reddit well for a successful IPO, though this might mean lower returns for some recent investors.
In its latest funding round in 2021, Reddit raised $410 million at a $10 billion valuation from investors like Fidelity, Quiet Capital, and Montauk Ventures. However, the market has shifted since then, and maintaining a $10 billion valuation would not be prudent. Investors see $5 billion as a more favorable valuation for Reddit for various reasons.
The Optimal Value
Javier Avalos, the co-founder and CEO of Caplight, a secondary data tracking platform, suggests that a $5 billion valuation aligns with Reddit’s reported $800 million annual revenue in its S-1 filing. This valuation would correspond to a realistic revenue multiple, fitting well within current market standards and the norms of Reddit’s industry.
“The August 2021 valuation was overly optimistic,” Avalos noted. “As the valuation corrected, it became more appealing based on revenue multiples and industry comparisons.”
Supporting the $5 billion valuation is data from secondary market activities. Greg Martin, co-founder and managing director at Rainmaker Securities, pointed out that recent secondary deals valued Reddit between $4.8 billion and $5 billion. Moreover, Caplight data revealed investor bids valuing the company around $5 billion.
Secondary data is significant as investors purchasing secondary shares look for a valuation that promises growth post-IPO.
Future Outlook
While a $5 billion valuation seems strategic for Reddit, it is not without risks. Despite the reduced valuation, there hasn’t been a surge in secondary market activity surrounding Reddit. Martin noted that while this isn’t necessarily negative, it raises concerns.
Offering shares to top users might be Reddit’s tactic to steer clear of speculative trading, according to Martin. He believes the current lack of significant investor interest could be a driver for involving users to boost trading momentum early on.
“Reddit hasn’t seen aggressive trading, which is not ideal for potential investors looking for early gains before the IPO,” Martin observed.
Ensuring a successful IPO hinges on avoiding overvaluation, as underscored by John Avirett, a partner at StepStone. Avirett emphasized the importance of surpassing expectations consistently to maintain valuations.
Despite considerations that may prompt Reddit to aim for a valuation above $5 billion, it might leverage its recent AI partnership with Google for added appeal, per Martin. Bringing liquidity to late-stage investors could be another motive, though investors hope for a different outcome.
Secondary investors concur that with its revenue, brand recognition, and potential for growth, Reddit stands a solid chance at a successful IPO, benefitting both itself and the investment industries.
“A well-priced IPO by Reddit can set a positive precedent for other companies considering going public, potentially accelerating IPO timelines,” noted Avalos.
