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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Read it every morning on TechCrunch+ or get The Exchange newsletter every Saturday. 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.
Pricing for Success
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.
- The Importance of Valuation: 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.
- Revenue Multiple Analysis: Using Reddit’s $800 million ad-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.
Comparing with Meta and Snap
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.
The Exchange: What to Expect from Reddit’s IPO
More when we get our hands on the S-1 filing, and then we will watch Reddit like hawks. Can this IPO be a success story for tech companies? Will it set the tone for future public offerings?
We’ll be keeping a close eye on this development and bringing you updates as more information becomes available.
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This article is part of a series of articles on the tech industry’s biggest news stories. Stay tuned for more updates and analysis from The Exchange team.
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