Reddit's IPO

The community for communities

_{Note: All $ figures are in USD unless otherwise stated}

Reddit is a forum social network, if you haven’t heard of it then you likely don’t use the internet much, as of October 2023, Reddit is the 18th most-visited website in the world.

It was founded back in 2005 in the now-famous startup accelerator Y Combinator’s very first batch of nascent companies. Just a year later, Condé Nast purchased the fledgling site, an early sign of success for both the startup and the accelerator program.

Fast forward to today, the platform now has over 260 million active users each week and last Thursday the company went public in a somewhat unusual IPO. It is still burning through $75m each year or over $200k each day and they offered its users shares in the company at a discounted price.

The share price soared on the first day, closing up over 48%, bringing the market cap to $8 billion, immediately bringing significant value to the users who took the opportunity to buy discounted shares.

An advertisers dream

Reddit predominantly makes money through strategic ad placements, allowing advertisers to speak to extremely targeted consumers. They provide a unique offering by providing access to an audience that is otherwise unreachable.

As shown in the chart below, 32% of Reddit users aren’t active users of Facebook, the most common social network platform in the world. Even Tiktok, the up & coming platform can’t attract 41% of Redditors.

With over 73 million daily active users in Q4 of 2023, spending an average of 25 to 30 minutes per day scrolling through content, it is an attentive audience. As shown below, the daily active users is on an upward trajectory, increasing by 33% in the past 3 years.

Where to from here?

Reddit plans to continue growing it’s advertising income stream through attracting more advertisers. As 25%+ of this revenue comes from the top 10 customers, there is a concentration risk that needs to be diversification. However a quick search on Reddit to see user’s experiences with advertising shows that there is still room for improvement.

Reddit also has a revenue stream coming from data licensing, where they provide customers access to real-time data streams of anonymous, public discussions on Reddit. With the increasing adoption of ChatGPT & the likes, Reddit believes their data will play a key role in training and improving AI models, increasing the value of this access.

They also plan to tap into the user economy, capitalising on the community marketplace they have built. This will likely look like transaction fees on goods & services sold through the platform. Given many Redditors aren’t using traditional social media platforms, both the data licensing & the user economy are unique propositions.

The estimated market size in 2027 for these streams are; Advertising $1.4 Trillion, Data Licensing $1.0 Trillion and User Economy $2.1 Trillion.

But there are risks, 55 pages of them to be exact…

A large portion of the content on our platform comes from a small number of Redditors - if a few decide to leave our platform and encourage other Redditors to follow them it would have an outsized impact due to low switching costs.

There is also a key risk for a change in internet search engines algorithms or dynamics would harm traffic to Reddit. As people increasingly use ChatGPT and other LLM AI models, there is reduced visibility of Subreddits that are often found on the first page of a Google search.

They are also early in their other monetization efforts, it is unclear whether Reddit has the execution to increase it’s data licensing & user economy revenue streams. Since 98% of their revenue comes from advertising and their top 10 customers make up 25%+ of this revenue - if a few leave, revenue plummets.

IPO Winners

CEO Steven Huffman & COO Jennifer Wong received $193 million & $93 million in compensation during 2023, most of which was stock options that have skyrocketed in value.

Sam Altman (OpenAI / ChatGPT CEO) raked in $615 million to add to his ever increasing stockpile after tipping in $50 million in the Reddit Series E.

Tencent, the Chinese gaming giant owns 11% of Reddit, following its $150 million investment in 2019.

Reddit power users who took the opportunity to buy shares at the discounted rate.

One who missed the boat - reddit cofounder Alexis Ohanian, who reportedly had a falling out with Huffman, his former college roommate, several years ago. He and Huffman relinquished their shares as part of the Condé Nast sale. Huffman then regathered a financial interest in the company when he returned as CEO.