Valuing Reddit is hard
Reddit and the limits of equity analysis
Here is a not especially useful comparison:
That’s Reddit in the past two years, compared with Facebook when it was roughly the same size in revenue terms. One might notice a lot of interesting differences. Facebook was already generating cash profits in 2009, and its growth rate was much higher, but Reddit is generating many more dollars per user than Meta was back then. Adding more details to the comparison would uncover other suggestive points of difference. You might also bring in valuation, noting that Reddit is trading at 13 times trailing revenue, right where Meta was after its 2012 IPO, and so on.
None of these details will matter much. I remember working as an analyst during Google’s IPO in 2004 and a financial journalist during Meta-née-Facebook’s IPO eight years later. I remember some of the things I said about each company. But I’m not telling you what they were, because it would embarrass me to do so. Suffice it to say that when Facebook IPO’d, the big worry in the analytic establishment was whether it could monetise on mobile devices. That did not turn out to be a problem:
That is Meta back when it was Reddit’s current size compared with today. It has compounded free cash flow at more than 50 per cent a year. The only possible response to this is awe.
It is possible to build a model that estimates what Reddit’s number of active users, revenue per user and cost base will be in five or 10 years. Lots of people are doing this now. Somebody’s model may turn out to be almost right. But in an important sense there is only one question that matters, and it’s not about numbers: can Reddit become a global phenomenon on the model of Meta, or even close? If so, its current $10bn valuation is a bargain.
Or will Reddit end up like Twitter/X and Snap, which are big but not as big as Meta, and have struggled to turn users into money as efficiently as Meta has? What, broadly, has made the difference? I confess that I do not know how to answer those questions — which are not financial questions in any meaningful sense — in a disciplined way. And I’m slightly sceptical that anyone else knows how to do it, either. But I’m open to suggestions.