A couple of weeks ago, the long awaited initial public offering (IPO) of Reddit took place.

There’s been a bit of an IPO-drought for the past 18 months. Reddit’s entry into the public sphere was not only exciting for its own patient investors* (Reddit was founded almost 20 years ago) but also watched with baited breath by the wider market. There’s more than a few people hoping that a good IPO would kick start the whole ecosystem moving again. You see, a quiet time at the top means that there are fewer exits and less liquidity at the next level, which eventually trickles down through the whole ecosystem. Reddit itself was a victim of this bearish market, as its initial plan to IPO in December 2021 was shelved, alongside its very ‘2021’ $10 billion valuation at the time*.

This time around, the company had a $6.4 billion valuation, priced at $34 per share. It went public on the NYSE on 21st March under the ticker symbol ‘RDDT.’

RDDT

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RDDT :

D-1 was good. Reddit ended the day up 48%, up to $50.44 per share from the opening price of $34. After the initial volatility, it has settled on around $44 - $47 per share for the last few days, so they are still up, (at the time of writing). An interesting facet of this IPO was how Reddit looked to reward its users with exclusive access, reserving 8% of the stock sold in the IPO for Reddit’s own power users.

It’s appropriate as one of the remarked upon aspects of Reddit, compared to other social media, is how much our perception of the platform is shaped by the users, not the team running it.

An example of this is the infamous GameStop story and how a band of Redditors on r/wallstreetbets had a huge impact on both GameStop the company but also on thousands of other retail investors and the culture around retail investing in the US itself.

So often your greatest strength is also your weakness and Reddit is no exception. Today, the company has 73 million Daily Active Uniques (DAUqs), over 100,000 communities, and 16 billion posts and comments. The level of engagement and activity on the platform is incredible but historically has been difficult to manage and seemingly tricky to monetise at a comparable level to other social media giants. The S-1 even notes its own users and their whims as a risk factor. It’s an unusual dynamic to say the least.

In the days since the IPO, the stock has marked as a short idea by Hedgeye, the investment research and financial media company, who believe that the initial price is a more accurate representation of Reddit’s value. I suspect that many investors are waiting on Reddit’s first earnings call in May and Q1 2024 results before making further decisions - including Reddit’s own userbase and retail investors.

In the meantime, let’s dig in.

*Maybe less exciting to its last lot of investors, who invested at a (private) $10 billion valuation…

*Yup, these guys.

🔎Contents

The history of Reddit
How does it work?
The numbers
…So?

📖The history of Reddit

Reddit was founded almost 20 years ago. It was the pre-iPhone, pre-blockchain, pre-5G era, way back in 2005. The founders, Alexis Ohanian and Steve Huffman, were part of an early Y Combinator cohort, with the infamous accelerator investing $12,000 to kickstart the company.

It took a few months to get going. At the beginning, the founders would pepper the site with posts from fake users to give the illusion of interest. But soon, it wasn’t required. Huffamn writes in the opening letter of the S-1 about “the day Reddit really came to life. We had been online for a couple of months, but until then there had never been enough posts from users on any day to fill the front page. That morning, to my surprise, I opened Reddit to discover the home page was overflowing with posts from real users for the first time.” Bingo.

The company started to climb and, unusually for a company that has got to this size today, it was acquired very early on by Condé Nast, who bought the company for $10 million, only 16 months after it was founded. I appreciate that this pales in comparison with the multi-billion dollar valuation today, but that’s not bad for less than two years’ work.

Three years later, the founders announced they were leaving and in 2011, Reddit was spun out as an independent company, operating as a subsidiary of Condé Nast’s owner, Advance Publications and Yishan Wong took over as CEO.

But even in 2011, what would be Reddit’s biggest - and ongoing - problems started to hit the limelight. It was famously a platform of free speech but this also attracted a substantial number of users, who really wanted to use their free speech to make racist, violent, and bigoted posts, to name a few sins. The growth of Reddit was seemingly not concurrent with their growth in moderation tools and content policies. In September of that year, CNN’s Anderson Cooper spoke out about r/jailbait, which contained suggestive photos of underage girls. It was only when a user posted a nude photo of a 14 year old that Wong deleted the subreddit. Even then though, Wong chose not to ban the creator of the sub - also the creator of r/chokeabitch and r/jewmerica, on the basis that Reddit was a “universal platform for free speech”.

Ellen Pao, Wong’s successor, took more action but at a cost. She removed various overtly racist, homophobic, transphobic, and revenge-porn centric subreddits. However, Pao suffered the repercussions of policing a state that had run lawless for too long: she and her daughter were victims of doxxing and death threats, horrific photoshops, even bounties to encourage people to physical harm. "The trolls are winning," Pao wrote when she resigned in July 2015.

Around this time, Ohanian had rejoined Reddit as executive chairman and Huffman rejoined as CEO, following Pao’s resignation. Given the circumstances around Pao’s exit, you might have expected a fast, tough stance on content but it was only in 2017 when, witnessed by a reporter for prosperity, the team finally weeded out and shut down the worst of these communities.

“Looking around, it’s easy to be disheartened about people and the state of the world, but on Reddit I have experienced the opposite: people naturally create community, and they are smarter, funnier, and more helpful and caring than I think we often give them credit for.”

— Huffman in the Reddit S-1

But there have been positive moments as well.

Starting small, there was a incident where Reddit users responded in full force to a ‘SEND PIZZA’ request. The twist? The request was a sign, in a window, at a children’s cancer ward in a hospital. The photo of the sign made its way to Reddit and, as a result, all the kids got a pizza party that day.

On a larger scale, in 2012, Redditors united in campaigning against the Stop Online Piracy Act (SOPA). The bill, which would have theoretically allowed the entirety of site like Reddit to be closed down if there was a single infringing post, had bipartisan support in Congress. Reddit and Wikipedia led the protests against it. Ohanian noted that “no one at the Reddit administrative team actually started that…We were following the lead of the user base”.

Reddit has also affected cultural moments in other ways. Former US President, Barack Obama, famously hosted a ‘Ask Me Anything’ (AMA) on the platform. The aforementioned GameStop saga saw the community go up against a hedge fund or two. Further to this, Huffamn writes that the community has “created and catalyzed global movements, including campaigning for net neutrality in 2015, starting the March for Science in 2017… They have also provided witness and galvanized worldwide response in times of crisis, such as r/worldnews’ coverage of the war in Ukraine and the generous outpouring of assistance coordinated by Redditors themselves.”

💡 How does it work?

A quick cheat-sheet for anyone who has got this far and actually never been on the platform. Skip this section if you’re already familiar.

Reddit is a social media platform. Like others, it is powered by what is described as user generated content (UGC), so posts that you or I might make.
Profiles are anonymous. Reddit profiles are - by nature - anonymous, unless an individual purposely discloses them. There is no requirement to use your real name and unlike a platform such as X (formerly Twitter), it’s unusual to do so on Reddit. This dynamic is crucial to create an environment where users are honest and open. There are a lot of deeply personal stories and questions shared on Reddit; these simply wouldn’t happen if it were not set up in this way.
Your posting history is accessible. What you post is attached to your profile, so others can see your history and get an idea of what you’re about but not necessarily ‘who’ you really are. Weird comments and inconsistencies are found out quickly.
Subreddits are themed discussion boards. The site is divided into themed discussion boards, called subreddits, which bear fairly ronseal names such as r/askReddit or r/gardening (both of which I follow). Users post on the subreddits and other users reply or comment within the thread.
Moderators run each subreddit. It’s the moderators (aka the mods) - who are also users - who ensure everyone plays by the rules of that particular subreddit be it that they only allow certain topics, posts must be structured in a certain way or frankly, whatever they want the rules to be. As a result, each subreddit has its own lore and flavour. In my view, the individuality and history strengthens the sense of community on each subreddit. No two are the same.
Karma is my boyfriend. Redditors are rewarded by other Redditors via Karma (the platform currency) and upvoting / downvoting as necessary. These points are attached to your profile - some subreddits only allow people with certain karma levels to participate, for example.
Reddit has a strong sense of canon and in-jokes. At the heart of Reddit is this funny, honest, kind, very passionate community. The more time you spend on the platform the more you become aware of the meta-references and jokes that abound. I also cannot stress this enough: Redditors really like puns (who doesn’t?!).

🧮The numbers

For sure, Reddit is an intriguing and unique platform but how does it perform as a business?

There’s a lot of good stuff here. The company reported $804 million in revenue in 2023, making the IPO valuation roughly an 8x multiple of last reported revenue. This 2023 result is a 21% increase on the year before, with a nice high gross margin at 86%.

Despite all this good stuff, Reddit is still losing a lot of money; the net loss was $91 million in 2023. This translates to a $69.3 million adjusted EBITDA, with one of the key differences being that 2023 included “restructuring costs of $8.1 million” as part of severance expenses related to a major workforce cut that the management didn’t feel was accurate to depict as a recurring cost - although the rate that you read about tech layoffs, I would understand if there was skepticism there. Back to the bigger picture though, this 2023 result is an improvement on the loss of $159 million in 2022 but there is still a long way to go before they start making money.

So, on first glance, the company is losing (a lot of) money but revenues are trending up and losses trending down. If Reddit continues these respective trajectories then we can slowly expect it to come to break even and, dare I say it, profitability.

But then, outside of the Reddit bubble, how does this compare to some of the competitors that it mentions in the S-1, the Metas, Twitters, and Snaps of the world?

A closer look at revenue…

The first thing to note is that several of these competitor platforms are already profitable with positive EBITDA, adjusted and otherwise. Reddit, despite its age, is still maturing in its revenue streams and investing in growth activities - not seeing the outcomes of them. As such, let’s focus on revenue alone to get a sense of their efficiency of revenue - and a good metric we can use for this is Average Revenue Per User (ARPU), which the S-1 helpfully details for us.

In the S-1, we see that Reddit defines its ARPU as quarterly revenue divided by its average DAUq for a respective geography. The Global ARPU Q4 last year was $3.42, a 2% decrease from the year before. Digging into this we see that the US, which makes up the majority of Reddit users, is also its most valuable geography with an ARPU of $5.51 for the same period.

*The recent uplift in DAUqs that impacted ARPU*

The slightly decline in global ARPU is attributed to the increase in DAUqs it appears that a decent amount of new users are not logged into the platform, which makes them less profitable from an advertising and revenue perspective.

The cynic in me think that there’s been a big push for user growth pre-IPO, which has come at the expense of key metrics as there is a bunch of accelerated users haven’t been converted / are of lesser quality - but that’s my speculation.

Back to the point - is $3.42 any good? Helpfully, SNAP and Twitter report(ed) their ARPU in very similar ways (N.B. Twitter used a more pointed definition of ‘monetizable’ DAUs rather than simply saying DAUs) and so we can use these as a comparison. In 2023, Snap’s global ARPU was $11.49. In 2022, Twitter’s was $18.71.

So, no, Reddit’s isn’t great. It’s a fraction of Snap and Twitter are able to achieve on a per user basis.

And in fact, all the reporting I’ve seen around this subject for the last few years point to the same conclusion: Reddit is one of the worst of the social media platforms for monetising their users. They are not effective at this on a per user basis and never really have been. I will note that the data reported in the S-1 is two to three times better than previous reports I’ve seen but is still very far away from what their competitors are achieving.

We can see that the current revenue is mainly advertising and there are also future revenue streams in process or planned for data licensing and growing the Reddit user economy. What is going wrong here and can they improve this?

Reddit’s current income: Advertising

Reddit makes around 98% of their revenue from advertising, so it’s worth spending a bit of time to see what’s up.

Advertising to interests profiles, not user profiles

As we touched on earlier, a key differentiation of Reddit to other communities is its anonymous interactions. These are predominantly text based (as in, users communicate via text so there are not many cases of identifying photos or videos) and you are connected through the communities that you follow, rather than users that you’re linked to. This changes the fundamentals of how advertising works for the platform. It’s more akin to podcasting advertising - where you are focusing on the subject matter being discussed - rather than the specific user profiles, like how Instagram works. It is interest graphing not social graphing.

To facilitate this, Reddit has built a “powerful advertising engine”, which uses natural language processing to sift through user-generated content for interest-based keywords. It’s contextual to what you’re reading not who you are.

How do they keep it clean?

While the company has massively cleaned up the UGC via active community removals, there is still a fair amount of NSFW content on the platform. It’s tricky as the users want it - they make it! It drives activity! - but the advertisers do not want to be next to it. Unsurprisingly, a fair amount is noted in the S-1 on the brand safety mechanisms that the platform offers. In short, Reddit limits ads to a subset of the platform that they deem “safe”.

This includes

Running a Community allow-list, which is a list of Reddit communities determined to be safe.
When an ad is on the Home feed, Reddit will “only show ads in specific locations where the adjacent content is from communities on the allow-list”
Also maintain a keyword blocklist to ensure that ads are not placed next to offensive or inappropriate content that is organic i.e. a post with certain words in it.
Finally, there are extra controls for brands to customise these settings further.

It’s difficult, isn’t it? Every social media has some level of brand safety mechanisms but the very DNA of how Reddit operates and is set up makes this far harder. It seems that they have to be way hotter on brand safety than other platforms because of Reddit’s long term reputation for ‘anything goes’ on the platform - which is not exactly what brands want. This interview from earlier this year - where the COO and EVP of Business Marketing and Growth insist (!) that brand safety is not a problem shows the communications issue that still surrounds it, even if the core one is fixed.

How good are the adverts?
Here’s my biggest issue: I spent a fair amount of time on Reddit. My profile has around 15 subreddits that I follow and others that I browse fairly regularly. Reddit is good at suggesting new content to me, new communities to follow. Yet Reddit is bad at connecting advertisers to me.

Here are some screenshots of what I have been exposed to recently….

I know I’m just one user and there is always nuance in these things but I am constantly amazed at how short this falls. I have often browsed or bought goods after seeing a Meta ad (I am very susceptible to advertising sadly). I have never done this from a Reddit advert.

The irony is that there is so much opportunity here. I do often use Reddit for consumer reviews or travel advice - and they point to this user behaviour in the S-1 - yet I see very little opportunistic joining up of product discussions and really intentionally placed marketing for that category.

I think a challenge of their advertising in general is the educational work that Reddit inevitably has to do to get brands to understand how they are different from other platforms and how to harness Reddit effectively. The S-1 notes various successful campaigns - so it can be done - but it seems to have far more challenges than platforms based around connections, rather than interests. It feels that it works best for uber specific that can zone in on a niche community or for the uber-broad, that is so mass market that a large percentage of communities will be relevant for them. As Reddit puts it: advertising is still evolving and “we are still in the early phases of growing this business.” I couldn’t agree more.

Reddit’s new income: Data Licensing

In February, Reuters reported on the new Reddit x Google deal to access Reddit’s data, via its API, for AI training - according to its various sources.

In the very usefully timed and definitely not strategically planned pre-IPO leak, it was noted that the deal was worth about $60 million per year. This figure was later confirmed and it expanded upon in the S-1 to note that the long-term contract was worth $200 million+ over the next couple of years. To put this deal in context, OpenAI has other agreements with firms like Shuttershock, the publisher Axel Springer and others that are more along the lines of $3 million to $5 million a year, so clearly the massive of Reddit data is seen as hugely valuable.

At $60 million a year, it’s not quite saving the bottom line but it’s a large incremental revenue stream and hopefully one that can be extended and grown beyond the initial contract. Good news on that, this market seems set to grow as well: the S-1 reports a 20% CAGR to 2027, reflecting how this is a fast-growth market that is crucial to driving the abundance of AI companies expanding right now.

This feels like a bright spot of opportunity for Reddit if they can expand their customer base and win more mega contracts like this.

Reddit’s future income: User Economy

“Commerce is another area of growth that has emerged organically on Reddit. In fact, new community-based marketplaces have already sprung up specifically for commercial purposes, such as r/PhotoShopRequest, where users can request photoshop services for payment, or r/RandomActsofCards, where users request and send cards to each other and spread a little bit of joy around the world. ”

— The Reddit S-1

Hmmmm. I’ve been on r/PhotoshopRequest and it’s… nice? Nothing to write home about. Yes, there is a small, consistent peer-to-peer economy there but it’s small and doesn’t use Reddit specific tools (i.e. Photoshops results are posted with PayPal and BuyMeACoffee links for payment) beyond the core posts.

This User Economy is touted throughout the S-1 as one of the key three future revenue streams. Of all three, this one has the least clarity on what this will look like; unlike the other two, which both are currently generating Reddit income, right now, the user economy only makes money for the actual users.

To be fair, the positive is that these examples from the S-1 demonstrate that Redditors are willing to trade on the platform and have organically done so, which is a good start. But Reddit now needs to work out how to intercept these transactions in some way, so the company can also benefit i.e. Reddit needs to build high quality tools that improve these type of transactions to such a degree that users don’t mind paying for said-tools. And this is a famously vocal and active community, who are not averse to boycotts or disruption to make their views known - so it really needs to be in the users’ interests. That’s very possible to achieve - but not easy.

The document also notes that this could extend into a physical marketplace but - again - this seems possible to scale but not easy at all, given the anonymous element of the user profiles. I don’t even pick up a Facebook Marketplace purchase without my boyfriend in tow for backup. I’m certainly not meeting LincolnBrickLayer_8 to swapsies in person. It’s unclear how these ideas cohabitate with online and IRL safety and this is important because it’s not exactly Reddit’s historical strength.

Other pointson the User Economy: they plan to build a Developer Platform with “additional tools and increased monetisation opportunities” and a Contributor Programme, so presumably enabling set-ups like ‘pay to enter’ and ‘pay to stay’ for subreddits, so users can monetise their content production - say for a superfan group or health advice. The latter in particular seems fairly straightforward and similar to subscriptions on Instagram, Substack, and other platforms.

*A classic r/PhotoShopRequest post. Also, cute dog.*

So there is definitely a way forward for this User Economy but, right now, it’s a lot of broad, big ideas here and not much detail to give investor confidence in how or when these might happen. Yes, Reddit is huge and it should not be beyond their abilities to build out some of the ideas here but I can’t help but have a feeling that these big plans were thrown in without much thought.

To go back to our starting point, the word ‘photoshop’ is mentioned 14 times in the S-1. Rightly or wrongly, it comes across that someone piped up in a meeting about this amazing little cottage industry on this subreddit and that spark has formed the basis of a large, strategic revenue stream for a now publicly listed company. It’s not that this is fundamentally a bad idea, it’s more that it feels like it hasn’t been thought through - or the very least that a plan hasn’t been communicated very well in the S-1.

I generally invest at seed stage, when companies often have fewer than 10 people in them and have been running for as many months. If I saw this plan at seed stage, even then I’d have a lot more questions about how this is all going to work.

But for an IPO? I think we can ask for a little more.

💥…So?

I probably should mention at this point… but I love Reddit. It may not always seem that way, given my points of view above, but I’m a long-time user. I find it incredibly helpful in gardening tips, niche consumer reviews, and generally amusing me with stories, debates, and observations. But as much as I love it, no company is perfect and Reddit is no exception.

Looking through the history and S-1, we see that time and time again, Reddit’s users are its pleasure and its pain. There is no doubt that Reddit is a very special platform and user experience. It has a unique community, who are engaged in different ways to what we see on other platforms, going beyond the online to have impact in the real world - both big and small. That’s magic and cannot be ignored.

But they also pose a challenge. More so than other platforms, it seemingly needs to constantly balance innovation and commerce with placating and negotiation with its users. This tension appears to have had a long term impact on advertising revenue and other income streams and needs to be solved. As we’ve seen, the company’s ability to monetise is pretty poor when considered in context and - at the end of the day - it’s also a business and needs to hit profitability to survive long term.

I do think there are huge commercial opportunities that the company can harness but the S-1 doesn’t give me confidence that the team is going to crack this anytime soon. It’ll be interesting to listen into the earnings call in May as I’m sure some of these questions will be raised directly to the people in control management team. I’ll certainly be logging on.