The social news aggregation website Reddit has officially filed IPO paperwork with plans to go public through listing on the NYSE in March 2024. This comes just after Reddit announced a $60 million partnership with Google to licence user-generated content to improve Google’s AI models.
This marks a major milestone for the internet discussion platform co-founded in 2005 by Huffman and Ohanian. With over millions of daily active users across 100,000 communities, Reddit mainly generates revenue through advertising and premium memberships.
With Reddit poised to be the first big social media IPO in years, this article explores key details around the company’s funding history, user base, business model focused on ads and subscriptions, competitors, and growth prospects.
History of Reddit
In 2005, Alexis Ohanian and Steve Huffman created Reddit, a website that collects social news. Reddit, famous for its decentralised discussions moderated by volunteer members, is taking a giant leap forward with this acquisition.
These moderators have a history of speaking out against corporate policies, such as the temporary suspension of several features when Reddit intended to charge third-party applications to access user-generated content.
Plus, people on Reddit seek out their favourite discussion groups by themselves, as opposed to other social media sites that use algorithms to guess user interests.
In 2014, Sam Altman led a $50 million fundraising round for Reddit; other investors included Marc Andreessen and Peter Thiel. Reddit was valued at $1.8 billion in July 2017 after raising $200 million.
Due to a $300 million investment round that Tencent sponsored in February 2019, the company’s value reached $3 billion. That value jumped to almost $10 billion in August 2021 when Fidelity Investments sponsored a $700 million fundraising round.
With an average of 267 million unique visitors every week and 73 million average daily active users (DAU), Reddit has over 100,000 communities. The average revenue per user (ARPU) for Reddit in the United States was $5.51 in the last quarter of 2023, down from $5.92 in the same period in 2022. Global ARPU for the company was $3.42, down 2% from $3.49 in the previous year.
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Reddit pre-IPO: $60 million deal with Google to boost AI research
After a long period without an IPO, community-focused message board site Reddit announced its intentions on February 22 to go public in March. This would make it the first prominent social media business to appear on the stock exchange in years and put private companies through their tests.
Officials from Reddit announced a $60 million agreement with Google, which would enable the tech company to use Reddit content to hone its AI models and improve services like Google Search.
In addition, Reddit was able to improve its internal site search and other services by gaining access to Google’s AI models as part of the partnership.
According to Reddit’s SEC filings, the company made $18.5 million in the quarter ending in December on $249.8 million in sales, marking the company’s first profit in two years. The business has announced its intention to use the ticker symbol RDDT when listing its stocks on the New York Stock Exchange.
In its long-awaited initial public offering, Reddit revealed its intentions to distribute some of its shares to retail investors and social network members, and it also disclosed sales of over $800 million and cutting losses from $159 million to $91 million in 2023.
Reddit’s business model
Advertisement:
One thing that makes Reddit ads stand out is the ability for marketers to zero in on certain communities or subreddits that are a good fit for their business. Promoters aiming to reach certain demographics have found success with this hyper-specific strategy.
There are two options for managing and delivering advertising on Reddit: managed and self-serve. The price of managed and self-served advertisements varies based on the target demographic.
Approximately $704 million in revenue was generated by Reddit’s online advertising segment in 2023.
Subscription:
Reddit Gold is a paid subscription that goes beyond ads and gives users access to even more features and benefits. These subscriptions have brought in consistent income for the business and won over a dedicated customer base. The premium costs $5.99 per month or one can get a 30% discount on the annual subscription worth $49.99/year.
Roughly 530 thousand paid users were active on Reddit in 2022. Reddit is expected to earn $36.5 million in yearly subscription revenue by 2026.
Collaborations:
Furthermore, Reddit collaborates with many businesses to provide sponsored content and additional promotional opportunities. The company has been able to make income via these collaborations while also benefiting its consumers.
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Reddit’s competitors
Below are some of the competitors of Reddit ranked by market capitalisation as of February 24, 2024.
- Meta Platforms Inc (1.23 trillion USD)
- Twitter (41.16 billion USD)
Future outlook
When looking at growth from a tech company perspective, Reddit is doing particularly well. Compared to the previous year, sales increased a fifth in 2023. There was a 27% increase to 73 million active users per day, which includes casual browsers who don’t sign up for an account but want to explore the site.
A potential new source of income for Huffman is pitching AI model-makers Reddit’s plethora of user-generated content. Huffman’s company knows how to get people talking, which could be what pushes him over the edge.
Additionally, with losses narrowing, it seems like Reddit meets all the requirements.
Should you invest in the Reddit IPO?
Pros
There are many reasons why Reddit believes you should invest in its first public offering:
- Great potential for sector growth
Except for Russia and China, Reddit plans to capture a portion of the $1.4 trillion worldwide advertising industry.
- Lower losses and more revenue
In 2023, Reddit’s sales increased by 21% to $894 million, while the company had a net loss of $91 million, which is almost 45% lower than the previous year.
- Securing licences for user-created content
With over 73 million active users per day, Reddit is seeing a fresh opportunity to licence its content to companies like Google that are looking to train artificial intelligence models using user-generated content.
Cons
Potential backers of Reddit’s first public offering should think about the following:
- Controversy throughout the past:
Businesses that offer advertisements should take their reputations seriously. This means that if there’s another controversy, Reddit can lose advertising revenue to its competitors.
- Risky company strategy:
Reddit has been around for about 20 years. Still, the business is losing money if the rumours about its finances are true. It is possible for publicly traded corporations to briefly operate without making a profit. At some point, Reddit’s investors will want to see proof that the company can generate profits for them.
- Level of competitiveness:
In the battle for advertising revenue and user engagement, Reddit faces off against Google, Facebook, Pinterest, and TikTok. These competitors are extremely well-funded and influential, which might hinder Reddit’s growth.
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Conclusion
In closing, Reddit’s upcoming IPO gives investors a rare opportunity to buy into a freshly public social media firm with strong recent revenue expansion. While Reddit enjoys strong user engagement and advertising revenue growth, its losses persist.
Interested investors should closely evaluate Reddit’s prospects before participating in the anticipated stock offering.
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