Icebreaker

Courtesy of Scott Galloway, No Mercy/No Malice, @profgalloway

Audio Recording by George Hahn

The market is shaped by psychology, not financials. And the psychology around IPOs has been in trauma since retail investors were run over by a semitrailer whose mud flaps read SPAC and Rate Hike. Winter came for IPOs, and we’re still waiting for the thaw. Despite a surplus of high-quality private companies and significant capital waiting to strike, new offerings are scant. With the broader market breaching all-time highs, the pent-up supply/demand of firms/capital is waiting for the green flag to drop. Specifically, a high-profile business whose first trade as a public company registers a healthy gain. I believe the icebreaker, due to price next week, will be Reddit. Note: Not financial advice.

The most valuable firms are a function of the resources and activities dominating the economy. We have evolved from an agrarian economy to an industrial one to one that runs on oil, then services and now … attention. U.S. Steel, Saudi Aramco, and Alphabet created unprecedented shareholder value as they commanded the seminal resource of their respective eras. Today the most valuable consumer companies monetize attention. And Reddit commands more attention in the U.S. than any company not owned by Alphabet. If attention is the new oil, then Reddit is Saudi Arabia, and resting beneath the platform is a sea of attention the size of the Ghawar oil field.

Calibrate

Fifteen years ago newspapers commanded three times their share of media dollars, relative to their share of attention, and digital one-third. The gangster investment thesis was the idea that the ratios would calibrate … and they did. The companies just ahead/behind Reddit’s U.S. attention reserves (Alphabet and Meta) have market capitalizations of $1.8 trillion and $1.3 trillion, respectively. Compared to its website traffic, Reddit is undervalued. This is a rough metric, since not all web visits are the same, and it doesn’t capture app traffic — but the brand also captures 850 million monthly users, more than Pinterest, LinkedIn, or Snap. The low valuation reflects Reddit’s modest revenue growth of 20%, the product of an inferior ad stack and business model. However, if/when it figures this out we’ll see the mother of all market calibrations. At an anticipated pricing that puts the valuation at $6.5 billion, Reddit is the only firm I can think of that has an opaque, but visible, path to a 100x return. Figuring out the monetization is hard. Developing a product that commands this level of attention is harder, and Reddit has done it.

Will Reddit figure out how to monetize its attention volcano? It’s doing the work. It restricted API access, akin to plugging leaks in its pipeline, and appears to have ridden out the controversy that caused. Now it is rolling out advertiser tools, taking advantage of its inherently contextual nature — advertisers don’t need to rely on mysterious algorithms or invasive trackers to target consumers interested in their category, they can simply buy ads in the appropriate subreddits. The site’s content is overwhelmingly in English, but non-English growth offers more upside opportunity, and for now it focuses the product and its costs on the most valuable consumers to most advertisers. Not making enough money from 7.5 billion visits per month is a good problem to have. The question not yet answered is whether Reddit is more like Digg and Vine or Alphabet and Meta. History — along with any recognition of just how difficult it is to build a global platform like Alphabet or Google — suggests the upside potential is asymmetric.

In addition, there are a couple chasers that could speedball Reddit’s market value. Its particular form of attention is desirable to the deepest-pocketed buyers of data on the planet: LLMs. Reddit conversations, which can be wide-ranging, in-depth, and extensive, are ideal training fodder for AI, and Reddit is starting to cash in. Starting. The company’s S-1 reports that it has had over 1 billion posts and 16 billion comments, and it’s booked more than $200 million in revenue from AI companies eager to train on that corpus. Interestingly, the investor with the second-largest voting stake, with 9.1% of the votes, is OpenAI CEO Sam Altman. It’s not AI “washing” per se, but AI remora — swimming next to (i.e., associating with) AI firms that have added the value of the global auto industry to their own market caps in the past 12 weeks. Oracle’s recent earnings call had more mentions of “Nvidia” and “AI” than “Oracle.”

One dark spot in Reddit’s profile is its governance structure: Thanks to dual-class shares and deals with the company’s two largest shareholders, CEO Steve Huffman has near-total control over the business as long as he remains in the job. That’s a bad system, regardless of the individuals within it. Finally, Reddit is the meme factory to the meme stock movement, and that’s not a sustainable engine for shareholder value. However, there is a non-zero probability we could see Reddit become the most talked about mid-cap firm in history, and thereby break the ice dam throttling the IPO market.

The Saudi Arabia of attention, a modest valuation, and option value as a meme stock: Champagne, cocaine, and disco.

Life is so rich,