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3 Valuation Charts: Buy Into An Eventual Reddit IPO?

Rumors have surfaced that online discussion platform Reddit may go public. Wall Street Memes looks at 3 valuation charts to assess the investment opportunity.

It is not official yet, but rumors suggest that online discussion platform Reddit might go public. The company, an important enabler of this year’s meme stock frenzy, is allegedly looking to hire investment bankers and lawyers to work on the IPO, the timing of which remains a question mark.

Should a Reddit IPO take place at the speculated $15 billion price tag, would it offer a compelling investment opportunity? Wall Street Memes looks at three valuation charts, based on information that is available to the public today, to answer the question.

Figure 1: Reddit Talk.

Figure 1: Reddit Talk.

A few numbers first

According to Reuters, we know the following to be true about Reddit’s key operating metrics:

  • The platform had more than 52 million DAU (daily active users) in January
  • Ad revenues reached $100 million in Q2, for an annual run rate of $400 million
  • Revenue growth in the same quarter was around 200% YOY

Armed with the information above, we can assess how Reddit stock’s valuation, assuming a $15 billion market cap, would compare against some of its key peers: Facebook, Twitter, and Snap.

Price to sales

The chart below compares price to sales, a key valuation metric, for each of the four companies in the internet and social media space. Notice that, based on this number, Reddit would be the pricier stock in the sector.

Therefore, based on this metric alone, Reddit looks a bit too expensive at $15 billion, to say the least. Value investors need not apply – which is true in the case of most IPOs.

Figure 2: Internet sector price-to-sales.

Figure 2: Internet sector price-to-sales.

Adjust for growth

But let’s be fair: comparing an internet company still in its early stages of growth with an established player like Facebook paints an incomplete, if not misleading picture. Therefore, I did a growth-adjusted P/S analysis that is depicted below.

For this exercise, I assumed a 75% annualized increase in Reddit’s revenues over the next five years, to $6.5 billion by 2025. This growth rate compares to Facebook’s 26%; Twitter’s 30%; and Snap’s 59%. All the estimates, except for Reddit’s, have been provided by Seeking Alpha.

Figure 3: 5 year forward growth-adjusted P/S.

Figure 3: 5 year forward growth-adjusted P/S.

Notice that Reddit’s valuation still looks rich compared to Facebook’s and Twitter’s, even after adjusting for annualized revenue growth of 75%. Only those who believe that Reddit’s revenues can rise at a faster pace might find the company’s valuation attractive, based on P/S metrics.

Price to DAU

Lastly, I looked at Reddit’s speculated market value relative to the number of daily active users. The chart below shows that, on this metric, Reddit finally lands near the cheaper end of the spectrum within the peer group.

Investors who believe that Reddit can do a good job (better than it does today) at monetizing its user base might be encouraged to know that $15 billion market cap represents a fair value of only $288 per DAU. Only Twitter, and by a narrow margin, is cheaper based on this metric.

Figure 4: Price-to-DAU

Figure 4: Price-to-DAU

Wall Street Meme’s take

Many factors should be considered when buying a stock, especially one that has just gone public. Based on valuation metrics alone and limited information available today, Reddit would likely be a pricey stock if valued at a market cap of $15 billion on the IPO day.

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(Disclaimers: this is not investment advice. The author may be long one or more stocks mentioned in this report. Also, the article may contain affiliate links. These partnerships do not influence editorial content. Thanks for supporting Wall Street Memes)