Reddit - bring community, belonging, and empowerment to everyone in the world

Stocks
, , ,
1

Reddit, known for its discussion forum, is listing on the New York Stock Exchange.

According to Reuters, this would be the first IPO of a major social media service in Silicon Valley in several years: the image scrapbooking service Pinterest went public in 2019.

Reddit has been on the threshold of an IPO since December 2021. In its previous funding round in August 2021, it was valued at $10 billion.

The company has not yet specified at what price, how many, or when it intends to offer shares. As part of the offering, the company also plans to offer a portion of its shares to its users.

Attached is the company’s S-1 prospectus, which is usually published about 3 weeks before the actual listing.
Document (sec.gov)

And a few IPO breakdowns:

https://seekingalpha.com/article/4673403-reddit-grows-operating-losses-remain-substantial-ipo-effort

Reddit IPO Breakdown - OnlyCFO’s Newsletter

15 Likes
2

If one had to name a class troublemaker among social media platforms, Reddit would be a strong candidate. Throughout its relatively long history, the platform has moved from its early days of inside jokes toward recurring crises. The core of the site is subreddits—communities that subreddit moderators rule with an iron fist. The site’s rules are very loose, which gives subreddit moderators significant decision-making power. In recent years, the company’s management has removed several racist subreddits and those glorifying Nazi ideology. The site is full of bots that repeatedly post the same content to subreddits (and perhaps manipulate votes). For example, before Donald Trump’s presidency, posts strongly admiring the candidate constantly rose to the site’s most popular list through a loophole in the system. Before that, posts mocking fat people constantly climbed the most popular list. Half of the site’s content is pure adult entertainment.

Because anyone can create and start managing subreddits, the site features everything under the sun. At its best, the site serves as a gathering place for various hobbyists. Funny memes and hilarious joke subreddits are also among the site’s strengths. A user’s experience of the site is therefore very different depending on which channels they follow. The voting and comment tree structure doesn’t exactly support actual discussion.

The company’s business is thus targeted advertising to users, like many other internet services. However, one would imagine that the informal nature of subreddits and the strong trend toward polarization would be a challenge for advertisers. For brands, it is important not only to reach an audience but also to maintain their reputation. Based on the S-1 prospectus and numerous controversial decisions, the company’s management is completely out of touch with how the communities operate.

16 Likes
3

Regarding that offering to users in the IPO, it’s only going to work in the US. Apparently for regulatory reasons.

Reddit is a bit of a weird platform in the sense that there is a massive amount of content, but Reddit has outsourced moderation to user groups. If this structure ever breaks down significantly, Reddit’s entire business model is pretty much doomed. I’m not so sure about investing in a company whose business relies on volunteer labor…

8 Likes
4

Great start to the thread! I also recommend reading the OnlyCFO IPO breakdown linked by @Yoda, which was very informative.

I have somewhat mixed feelings about this (if I looked at all the specs correctly):

  • The IPO price will surely be quite high or rise high by the time one can actually buy this (on the other hand, since the market has been so frozen, the starting price might even be lower). The valuation will probably be at least 5 billion (as the CEO’s additional incentive depends on this).

  • Growth has been slowing down.

  • The company has no debt, but is still making quite significant losses.

  • RSUs/options that are still under lock-up at the IPO will dilute this at least to some extent.

  • Advertising revenue is the primary source of income, but in the future, the goal would be to monetize through other channels, e.g., by selling data (apparently a deal worth 60M per year has already been signed with Google).

  • On the other hand, Reddit hasn’t monetized very aggressively with advertising yet, so if they decided to put effort into this, more money could definitely be made. But if this isn’t management’s focus, it’s quite hard to say how well those other initiatives will perform in the future.

  • There are also risks related to the content side and the “dependency” on moderators, which others already brought up.

Overall, my feeling is that once this is listed, I’ll watch the situation for at least a year or until the employees’ lock-ups expire, and then see where things stand and how the revenue streams have developed.

4 Likes
6

Are there really any other companies of this type on the stock market? Facebook/Meta is the closest that comes to mind, but even that is a quite different company. It seems quite likely that if they start over-monetizing or cramming too many ads onto the site, users will just flee elsewhere.

7

Pinterest and Snap are also quite close if you look at social media companies on a general level.

1 Like
8

At a quick glance, they look like semi-stagnant performers, unless you take into account the COVID bubble that hit digital firms. And they don’t pay any dividends.

9

Reddit is pretty fun. Personally, I see it as closer to something like a forum / Jodel (I haven’t actually tried Snap, Pinterest, etc. I don’t even have Facebook). I can’t think of anything else similar except maybe something like 4chan or the like, but that’s a bit too intense of a place.

I bet it’ll be extremely volatile at the start. It’s a bit 50/50 whether I’d jump in to meme with a position or just watch from the sidelines (probably the most likely; I haven’t put anything into other meme stocks either). All other meme stocks have been pretty quiet this past year.

10

https://www.reuters.com/technology/reddit-ai-content-licensing-deal-with-google-sources-say-2024-02-22/

Reddit is also selling its site content for AI training, which is certainly a very small side stream compared to ad sales for now, but interesting nonetheless.

The link reveals that Google is paying $60 million per year for the right to use the content to train Bard.

2 Likes
11

A while back, the Apollo app, for instance, was preferred for mobile Reddit browsing over the company’s own app. Last summer, Reddit put a steep price tag on its API, which in practice drove third-party apps out of the competition. It would have cost Apollo, among others, $20 million USD annually to continue its operations. Apollo for Reddit is shutting down | The Verge

This is likely loosely related to the thread.

1 Like
12

It likely relates very strongly to the thread, as Reddit can only show ads on platforms it controls. In other words, by shutting down third-party mobile apps, users are driven to use either Reddit’s official app or the mobile website, and at the same time, ad revenue is generated from them. Reddit is burning cash at a fast pace, and money is made, to put it bluntly, either by selling user data or by showing ads. Both of these are being practiced.

2 Likes
13

Quite a handy platform, but in my opinion, too hobbyist-based. Commercialization has its own challenges. I have never gone to Reddit to buy anything, and I also know how to ignore ads in the feed.
Content and its moderation also bring their own challenges. The entire service’s content will be under review during the listing.
They did succeed in the user interface overhaul. Reddit also has a fair number of female users, although the majority are certainly men.
And let’s also mention that Discord has taken this hobbyist base away from Reddit. Reddit is often that historical cornerstone of a community that grows quiet over time.
So, how will they succeed in commercializing Reddit for the masses? And who handles the moderation? :grin:

2 Likes
14

It would be nice to see data on active users before and after the 3rd party app ban. I personally haven’t even logged into Reddit since Apollo shut down. Previously, I used it daily.

15

“In its S-1 filing, Reddit cited the popularity of WallStreetBets among retail investors as a risk to its stock price, which it said could experience “extreme volatility” for reasons unrelated to the company’s “underlying business or macroeconomic or industry fundamentals.” Effectively, this is an acknowledgment that it could become a meme stock.”

https://www.marketwatch.com/story/reddit-ipo-offers-unprecedented-twist-in-meme-stock-saga-says-firstrade-892f12fa

1 Like
16

Tomorrow is the $RDDT IPO with a $6.4B valuation.

Can this be bought on Nordnet? At least I couldn’t find it via search yet…

17

It’s about to start happening soon… :scream:

https://twitter.com/vontuchman/status/1770829979061813630

image

3 Likes
18

Here is a story about Reddit from Sijoittaja.fi, which takes a couple of minutes to read. :slight_smile:

In terms of revenue growth, Reddit is in the top tier with a 25 percent growth rate. The company’s gross margin is also at a high level, reaching 86 percent last year. Reddit is focused on text, not videos or images, so Reddit is able to keep costs at a lower level. This means high profitability potential in the future, provided that Reddit’s revenue continues to grow strongly.

1 Like
19

I’ve been reading through Reddit materials lately in my spare time. A loss-making forum platform that recently IPO’d might not normally be of interest, but a WSJ article I read earlier this summer has been stuck in my mind. More and more people are searching for information by Googling Reddit discussions directly.

https://www.wsj.com/tech/personal-tech/can-you-replace-google-search-with-reddit-i-tried-it-for-a-week-ea1f36c5

Why is this an interesting observation? Reddit, despite all the AI licensing LLM hype, makes >90% of its money from whatever ads. This means that advertisers place their ads in subreddit threads. Thus, Reddit competes for the same digital advertising budgets as mega-tech giants like Alphabet (Google, YouTube), Meta (FB, IG), and Amazon (Amazon ads). In this competition, for example, Snapchat and Pinterest have unfortunately gotten stuck between the giants’ buttocks.

If I’m not alone in my thinking, Reddit might have a real chance to grab a reasonable slice of advertising budgets, perhaps even from Google’s turf, as searching for information on Google is admittedly becoming increasingly painful.

Reddit is actually investing in its own search so that you wouldn’t necessarily always have to Google “How X works reddit”.

"The key to searching on Reddit…is not searching on Reddit. Instead, add the word to Google searches, say power users. Reddit is working to improve its on-site search, such as by surfacing snippets of whatever you’re looking for more prominently, says Serkan Piantino, Reddit vice president of product, AI/machine learning, search and safety. "

On the other hand, ChatGPT and its peers are developing at a massive pace, and some queries will likely shift to AI over time.

Reddit has the advantage that an advertiser can be sure their ad is in the right context. For example, if I wanted to sell hiking gear, my ad would be targeted at threads where hiking equipment is already being discussed. This isn’t the case on FB, where algorithms target ads to “the right people” (bots?) using their best spy data.

Reddit also has another interesting advantage. Running it costs almost nothing: gross margins are approaching 90%, which is at Meta’s level. Forum servers don’t suck up much money. It’s different for something like the much more technologically demanding Snapchat, which has to constantly be at the cutting edge to enhance people’s vain self-promotion. And Zuck copies the features a moment later.

Reddit is loss-making, but that’s because after server fees, all the money goes into R&D, marketing, and administration etc. expenses.

The question is, is Reddit ultimately a spending machine like the old Twitter, or will the business scale nicely as the top line grows? With that gross margin, Meta-level profitability should be “easy” to achieve, meaning 40% operating margins once revenue reaches several billion. Right now, it’s around a billion dollars. The global digital advertising market is around $700 billion and still growing.

Thoughts?

8 Likes
20

Advertising has significant potential in itself, but I believe the deciding factor is, above all, the effectiveness of the advertising.

  • Even though targeting can work well on Reddit, a truly effective digital advertising channel requires 1) scale and 2) results. Neither is sufficient on its own – except perhaps for harder-to-measure brand campaigns, etc., but those won’t get you into the big leagues.

  • A massively high advertising ROI doesn’t help most advertisers if you can only acquire a few dozen or hundred customers per month. Scale alone isn’t enough either, as better-performing channels (e.g., Meta, YouTube) are readily available.

  • As I understand it, the effectiveness of Reddit ads has been relatively modest so far, and while the content is highly relevant, not all specific subreddits are massive (though non-subscribers do find them). If they manage to develop good ad formats, increase ad frequency without annoying users, and further improve relevance, I believe the results could improve significantly.

2 Likes
21

Can’t ads also be targeted to subreddit subscribers without the user having to be in a hiking thread at that exact moment? For example, if someone subscribes to the r/hiking subreddit, they can be shown hiking products in any thread.

1 Like