Reddit’s IPO Will Test Investors’ AI Gullibility

IPO watchers are gearing up. We’re likely only a couple of weeks away from the next high-profile IPO, this time of Reddit, a social media service. The first big-name tech debut since last fall’s flurry of offerings from Instacart, Arm and Klaviyo, Reddit’s debut presents a test of investor gullibility. The company has suggested in its IPO filing—and some on Wall Street are echoing the case—that the company could benefit from licensing its user “data” (posts and comments on the site) to artificial intelligence firms for training large language models. Let’s be clear: The only way Reddit’s IPO is likely to stir any interest is if investors believe that story. 

In fact, we got a flavor of the arguments we’ll hear from a report issued by New Street Research last Friday, where the firm launched coverage on Reddit with a report headlined: “Will AI data licensing take [Reddit] to the moon?” New Street suggested Reddit’s valuation, on a “base case,” or middle-of-the-road assumption, could be $10.4 billion, based partly on its projection that Reddit could generate as much as $672 million in AI licensing by 2027. Reddit has said it expects at least $66.4 million of data licensing revenue this year. This figure should grow, but investors should be wary of overoptimistic projections around such a bubbly topic as AI. Notably, The Wall Street Journal reported on Friday that Reddit’s bankers were targeting an IPO valuation between $6 billion and $6.5 billion. That was down from the $10 billion at which Reddit was valued in a 2021 fundraising, implying that its bankers are taking a cautious approach.