The year is ending on an upbeat note for the market, thanks to the Federal Reserve’s interest rate ceasefire. Among the biggest beneficiaries are small tech companies that were among the hardest hit by the market’s plunge over the past couple of years. Shopify, Snap, Coinbase and Affirm have rocketed since late September, rising between 50% and 150% each in the past three months, compared to the Nasdaq’s rally of 15% over the same period. A bunch of bigger names, from Salesforce to Pinterest to Snowflake, has risen 30% to 40% over the same period. In contrast, big tech companies—Alphabet, Amazon, Apple, Meta Platforms and Microsoft—have had a steadier appreciation through the year and therefore less of a quick jump up lately.
Given how much some of the smaller stocks fell in 2022, the recent recovery won’t come close to making up investor losses. Still, this recovery is good news for companies in the IPO queue. Assuming the recovery holds, they can hope for much better valuations when they go public than would have been the case a little while ago. Take Reddit, one such IPO candidate that’s probably most often compared to two other relatively small social media firms, Snap and Pinterest, from a valuation perspective. Those two companies are now trading at an average forward sales multiple of 6.3, compared with 3.8 three months ago, according to Koyfin data. Applying that average multiple to Reddit, and assuming it generates a billion dollars in revenue next year—which looks reasonable, given what we revealed in this scoop today about Reddit’s 2023 revenue growth—you’d value it at $6.3 billion today. Three months ago it would have been $3.8 billion!
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