Despite aiming for similar valuations, Reddit and Astera IPOs tell very different stories
Despite aiming for similar valuations, Reddit and Astera IPOs tell very different stories
Veteran social network Reddit, which less than a year ago was valued at $16.6 billion, and the relatively young and profitable semiconductor developer Astera Labs, are expected to go public next month. Both are aiming for a similar valuation, but the differences between their financial performances show how much the technology sector has changed
This coming March, two interesting technology IPOs are expected to take place - Reddit and Astera Labs, in what looks like an intergenerational baton transfer. On the one hand, a company that was established almost 20 years ago, which worked to establish itself as a space for self-expression regardless of profits; And on the other hand, a relatively young company that is trying to meet a concrete need in the field of semiconductors and is already showing net profits.
Astera Labs was founded in 2017 in California by former executives at the semiconductor company Texas Instruments. The company seeks to solve "bottleneck" problems in data centers. One of the core products it sells is designed to improve the efficiency and speed of connection between different software and hardware in data centers.
The semiconductor it developed helps cloud service providers and enterprise customers connect network, memory and storage chips so that data centers can better support the required computing activity. Against the backdrop of a boom in generative artificial intelligence applications in the past year, Astera Labs' products are enjoying increasing demand, and today it works with companies such as Amazon's cloud unit AWS, and Microsoft's Azure. According to reports in the "Information", Astera Labs recorded revenues of $50 million in the fourth quarter of 2023, and is expected to conclude 2024 with revenues of up to $300 million. It concluded 2023 with a net profit.
In September 2021, the company raised a $50 million Series C at a value of $900 million. But the great interest in the company's products and its healthy performance boosted its valuation to $3.15 billion in November 2022, when it raised $150 million in a Series D. All this, at a time when most of the technology companies and startups suffered deep falls in valuation. The last two rounds were led by Fidelity, and Intel also has a stake in the company through its investment arm Intel Capital. In total, it has raised $206 million in four rounds. It is estimated that the company will try to achieve a value of $4 billion in an IPO in March.
On the other hand, Reddit, a company whose product hardly needs to be introduced, is aiming for a valuation not too far from Astera Labs - a little over $5 billion. In 2021, when it considered issuing for the first time at the height of the hype of technology stocks and the huge rally in their price, it aimed to achieve a value of $15 billion. Reddit, which has been called "the front page of the Internet" more than once, was established in 2005 and has since become one of the most popular sites in the world. Over the years, the company, which is managed by Steve Huffman, raised $1.3 billion over ten rounds. Its last round in August 2021 was also led - like that of Astera Labs - by Fidelity. Reddit raised $410 million at a valuation of $10 billion at the time.
In April 2023, Fidelity still estimated Reddit's value at $16.6 billion, but in June already cut it by about 40%. Going public at a value of about $5 billion will further cut the value of its investment. Reddit's value is shrinking, and not by accident. Unlike Astera Labs, despite Reddit's popularity and advanced age, it is not profitable. It has 70 million daily users - a fraction of Facebook, Instagram and TikTok. It concluded 2023 with revenues of $800 million, which it still does not know how to translate into net profit - 19 years after it was founded.
Despite the unimpressive performance, especially against the backdrop of other social networks' ability to generate profits, the tech market is nevertheless showing some excitement ahead of Reddit's IPO. The well-known brand is not only the first social network to issue since Pinterest in 2019, but also a sign of the awakening of the IPO market, at least that is what some people believes. In the past two years, there were only 15 IPOs of technology companies, six IPOs in 2022 and nine IPOs in 2023. This is compared to an explosion of 121 IPOs in 2021 (not including the notorious SPAC mergers). The slowdown in the markets, the increase in interest rates and rising inflation led to value reductions and an almost complete stop in issuances. Some companies that had already filed a prospectus, like Reddit, have been waiting for years to issue on better terms.
Companies that did issue in the last two years did so from stronger starting points than Reddit. A higher proportion of these companies presented a net profit to investors - 33% in the last two years compared to 20% in 2021. Astera Labs in this sense symbolizes the direction of the technology IPO market: no longer old companies that do not know how to generate profit, that mainly build a brand but not a sustainable business, but young companies that solve real problems and present a profitable product.
While postponing its IPO, Reddit has seemingly made moves that bring it closer to profitability, such as creating a new source of revenue by charging third parties for access to its users' data. But this move was made mainly due to the boom in artificial intelligence and a strong need of big players in the field for access to data. Reddit's operations are defensive and the IPO is intended to generate a new source of life for it in the form of public capital. Astera Labs is being pushed to go public because its business requires a lot of capital, and if it wants to be a real competitor in the booming market, it needs to get out of the shadows of the venture capital market much faster.
