From: allin
Reddit’s S-1 filing for its Initial Public Offering (IPO) provides insights into its financial performance, user growth, and strategic challenges [01:13:07]. The company’s business model, which relies on user-generated content, allows for a high gross margin, but it faces challenges in monetizing its sophisticated user base and navigating the evolving landscape of AI licensing [01:13:31].
Financial Performance
In 2023, Reddit reported a revenue of 91 million in 2023, an improvement from $159 million in 2022 [01:13:16]. Reddit’s free cash flow is currently negative [01:13:22].
A notable aspect of Reddit’s finances is its gross margin, which stood at 86% in 2023, up 2% year-over-year [01:13:39]. This high margin is attributed to the fact that users produce the content without direct payment from Reddit, unlike platforms that pay creators or acquire content [01:13:33]. The company holds $1.2 billion in cash [01:14:00].
User Growth and Monetization Challenges
Reddit reported 76 million daily active unique users in 2023, a 27% increase year-over-year [01:13:44]. This recent growth, particularly in the last two quarters of 2023, is significant, as the platform had previously seen growth flatlining at around 5% annually [01:15:33]. The company’s average revenue per user (ARPU) is notably low at $3.42 [01:13:49], which is less than 10% of Facebook’s ARPU [01:16:30]. In fact, Reddit’s ARPU was down 2% year-over-year [01:19:33].
Reddit’s user base consists of highly sophisticated internet users who are often anti-ads and less likely to click on them [01:19:37]. The platform’s anonymous nature also limits its ability to collect demographic data for targeted advertising, unlike Facebook [01:19:48]. The recent increase in Daily Active Unique users may be partly due to a strategic decision to allow more “logged out” users, leveraging Reddit’s strong search engine ranking authority [01:18:04].
Direct Share Program
Reddit plans to offer a portion of its IPO shares directly to its most active moderators (mods) through a direct share program [01:14:07]. This initiative aims to include the community in the IPO, although concerns have been raised about involving “unqualified retail buyer pools” [01:14:28].
AI Licensing Deals: “Tac 2.0”
Reddit has ventured into AI licensing, securing deals worth 60 million per year non-exclusive deal with Google to license its data for training Gemini models [00:40:28], [00:41:41]. This strategy is described as “Tac 2.0,” where companies like Google pay for unique data to train their AI models, similar to how they previously paid for search traffic acquisition (Tac 1.0) [00:43:16].
This new revenue stream is seen as a significant, high-margin opportunity for businesses with unique data [00:43:31]. While large platforms like Reddit are securing substantial deals, the potential for smaller websites to license their data for AI training also exists, although attributing incremental value and determining fair compensation remains a challenge [00:45:12]. The long-term value of such content is debated, as much of it can become stale or be overshadowed by the exponential growth of new data [00:47:26]. The non-exclusive nature of these deals allows data providers to potentially license their content to multiple AI companies [00:50:05].
Ownership and Valuation
Reddit was initially sold for approximately $10 million a year after its launch in 2005 [01:20:39], [01:22:23]. There has been a “long game” conspiracy theory suggesting that former CEO Yishan Wong, along with co-founder Alexis Ohanian and Sam Altman, orchestrated a plan to regain control of Reddit from its previous owner, Condé Nast [01:19:56]. This alleged plan involved demanding options specifically in Reddit from Condé Nast, creating a separate cap table, and bringing in outside investors like Sam Altman [01:21:07]. Ultimately, Condé Nast spun off the company, and its parent company remains the largest shareholder in Reddit, owning 30% [01:21:40], [01:22:08].
The potential valuation of Reddit in its IPO is a subject of discussion, with estimates ranging from 5 billion [01:16:54], [01:17:16]. For investors, the key factor is whether Reddit’s recent user growth will continue or revert to its historical lower rates [01:16:11]. The company also needs a clear strategy to address its low ARPU to justify a higher valuation [01:17:07]. The IPO timing is critical, as a delay could necessitate an updated S-1 filing with Q1 results, revealing if the recent growth is a sustainable trend or a one-time anomaly [01:17:44]. This represents one of the major challenges for the company.