Reddit being valued at $5 billion appears to be quite justified.

Amazon’s failed attempt to acquire iRobot underscores the significance of the initial public offering (IPO) market this year. The increasing regulatory scrutiny on major tech firms acquiring smaller companies means startups might find one of their primary exit strategies blocked in the short term.

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With the challenging environment for mergers and acquisitions, particularly for large tech companies who often choose acquisition over internal development, startups, including unicorns, may have limited options for liquidity outside of going public. This situation elevates the importance of Reddit’s exploration of its IPO valuation, particularly after a 2023 that saw few public launches.

Reddit’s IPO pricing is crucial. A low price might lead to trading results considered superficial rather than substantial. Conversely, a high price could result in a decline from its IPO value.

Private tech companies are eager for successful IPOs that resonate, but overcautious pricing by Reddit could undermine market confidence. On the other hand, overpricing risks discouraging other companies from going public if Reddit struggles post-IPO. For instance, Instacart’s inability to maintain its post-IPO gains at $30 per share served as a cautionary tale for others, as its value later dropped to just over $25 per share.

Bloomberg has reported that Reddit may aim for a valuation of at least $5 billion, half of its 2021 valuation of $10 billion but still a significant exit.

Recently, Reddit’s ad-based revenue reportedly reached $800 million in 2023, a 20% increase from the previous year. This can be compared to Meta’s 23% revenue growth and Snap’s 5% increase in the same period. These figures reveal Meta’s substantial profitability, with a 40% operating margin in Q3 2023, whereas Snap reported a net loss and declining adjusted profitability.

At a $5 billion valuation, Reddit’s ads-based revenue gives it a multiple of 6.25x, expanding to 7.5x at a $6 billion valuation. Assuming Reddit is less unprofitable than Snap, its revenue multiple might sit between those of Snap and Meta. However, the modest gap between Meta’s and Snap’s price-sales multiples suggests caution in valuing Reddit, as either Meta is undervalued or Snap overvalued.

Further insights are anticipated upon the release of Reddit’s S-1 filing, which will be scrutinized closely. The outcome of Reddit’s IPO could set a tone for other large, private tech companies, with many founders, investors, and billions in capital eagerly awaiting the results.