After Reddit Inc. filed for an initial public offering (IPO) last week, with its listing valuation still undisclosed, one IPO market expert says investors could be looking at a valuation within US$4-6 billion.

Greg Martin, managing director of Rainmaker Securities, says the online platform, which allows users to engage with countless community forums, attracts “a lot of eyeballs,” with its primary form of revenue generation pulled within advertising infrastructure. 

“I think 98 per cent of their revenue comes from advertising,” Martin told BNN Bloomberg in a television interview on Monday. “Very similar to Pinterest or Snapchat. Think of the earlier social media companies like Metta and Twitter — this should track the way those trade.”

Martin said that companies such as Pinterest and Snapchat have comparable business models, trading in the “five to seven times revenue range.”  

“For a company like Reddit that just did $800 million of revenue, if you simply apply those multiples I think you’re probably looking at a valuation in the $4-6 billion range.”

Martin added that the San Francisco-based company is attempting to leverage recent developments that will allow third parties to license access to data on the platform, including to train artificial intelligence models. 

AI story 

Last week, Reddit announced a deal with Alphabet Inc.’s Google, which would allow Google AI products to train off of Reddit datasets, helping to enhance advanced language models. 

“I think they’re trying to get a premium multiple by pushing the fact that they recently did a deal with Google who is going to use all of their data to train their AI, and they're going to help Google with their search,” Martin said.

“I really think they’re trying to be a little different from Pinterest and Snap but I think it’s going to be a challenge because their business pretty much mirrors what Pinterest and Snap does,” he said. 

Risk of stock meme culture 

Another challenge for Reddit entering a public market is the risk of meme stocks, according to Martin, which are based on heightened sentiment online instead of company valuations. Reddit users have previously organized on the platform to influence market reactions, and Martin says “there’s a real risk that people start talking about Reddit stock on Reddit’s platform.” 

He added that Reddit won’t want to be stuck in a “downward meme-stock spiral.” 

“There’s no doubt that their users historically felt like it was a safe place to be against the commercial interests of traditional companies. Now that they’re planning to go public and be a public company and monetize those user bases, I think there’s a risk that the users revolt.”

One of the mitigation strategies Reddit is deploying to prevent this, Martin said, is offering stock allocation to users who manage Reddit communities, so they “become their advocates and ambassadors.” 

 “I think it would be very interesting to watch,” he said.

 For the rest of Martin’s interview with BNN Bloomberg, watch the video above.