After years of anticipation, Reddit will finally hit the public markets. The social media platform is planning to set a price for its initial public offering (IPO) on March 20, and then begin trading on March 21.
Wondering if the Reddit IPO is worth investing in? Let's take a look what you need to know about the newest social media debutante.
Image source: Getty Images.
What is Reddit?
Reddit might be a household name, but its platform isn't as easily understood as some other social networks like Meta Platforms' Facebook or Instagram. Reddit describes itself as a global digital city, and the social network is organized around "subreddits" and threads based on specific interests, which cover things like home improvement, travel, and entertainment, as well as more obscure subjects. Users post on a subreddit and you can read responses in the subsequent thread. Currently, there are more than 100,000 active communities, or subreddits, on the platform. Users post anonymously, which also makes it different from most social networks.
Reddit has a broad audience with 73 million average daily unique visitors and 267 million average weekly unique visitors, up 29% from a year ago. About half of those come from the United States. In December, it had more than 500 million unique visitors.
Like other social media companies, Reddit makes money primarily through advertising.
Reddit's key numbers
Reddit was founded in 2005 by a pair of University of Virginia roommates and a third founder, but the company is still not profitable.
In 2023, its revenue grew 21% to $804 million, but reported a generally accepted accounting principles (GAAP) operating loss of $140.2 million, which was a slight improvement from the $172.2 million it recorded in 2022.
Reddit also lost money on an adjusted earnings before interest taxes, depreciation, and amortization (EBITDA) basis with a loss of $69.3 million in 2023, compared to a $108.4 million loss in 2022. It reported negative free cash flow of $84.8 million in 2023, an improvement from $100.3 million in 2022.
Reddit's growth strategy
Reddit aims to grow its user base and improve monetization by increasing awareness of the platform and its use cases, improving engagement, and encouraging more frequent use of the product. To accomplish that, it's improving discovery on the site through machine learning, modernizing search, and improving user experience in other ways.
The company also sees itself as a leader in contextual advertising, much like Pinterest is. Pinterest caters to people looking for images that will help with a certain subject, like fashion, home improvement, or children's activities, and Reddit users often come to the site for a similar reason. For instance, a visitor to the subreddit r/camping is likely a good target for companies selling equipment.
Pinterest often says that its users like to see ads since they are often looking for products. While not every subreddit lends itself to ads, there are certainly some good targets for advertisers out of the more than 100,000 options on Reddit.
Image source: Getty Images.
How Reddit could be an AI winner
While advertising is currently Reddit's primary way of making money, that could change, and artificial intelligence (AI) is a major reason why.
The company sees itself evolving from an advertising business to benefiting from data licensing, including AI model training. In Reddit's own words, "Reddit's vast and unmatched archive of real, timely, and relevant human conversation on literally any topic is an invaluable dataset for a variety of purposes, including search, AI training, and research."
The company also says that its data is a "foundation piece" in AI technology and training for large language models like ChatGPT.
It's perhaps not a coincidence then that OpenAI CEO Sam Altman is one of the biggest investors in Reddit and is also on its board. Given that relationship, it's easy to see how OpenAI would use Reddit posts to train its models, if it isn't doing that already.
It's unclear how much Reddit can charge for its data, but the company said it entered into data licensing arrangements in January worth $203 million over the next two to three years, and it expects to make at least $66.4 million of revenue this year from data licensing. The value of Reddit's content is likely to go up as the AI market grows, and the social media platform also has the advantage of generating new posts every day.
Should you buy the Reddit IPO?
Reddit plans to sell 22 million shares in its debut out of 160 million shares outstanding in its IPO, which does not include stock units and stock options. Based on a fully diluted basis at its target share price of $31 to $34, Reddit is targeting a valuation of about $6.5 billion, giving the company a price-to-sales ratio around 8, which is similar to Pinterest's at 7.7 and Meta's at 9.9.
However, Reddit is still operating at a significant loss and it could be several quarters or even years before it reaches profitability.
Given that, I think investors are best off staying on the sidelines for now. However, the AI story is worth watching here as Reddit could be a big winner if it can capitalize on the value of its data.
