After years of stops and starts, a Reddit IPO is finally on the horizon. But the social media player will certainly have some hurdles to clear to win over investors. For starters, Reddit must show it can find its lane in an industry dominated by the likes of Meta, Alphabet and Amazon.
San Francisco-based Reddit would be the first major social media company to go public since Pinterest in 2019 and Snapchat parent Snap's 2017 IPO. Chief Executive Steve Huffman offered an upbeat view in the message-board operator's IPO prospectus, saying Reddit can grow "through advertising, monetizing commerce on the platform, and licensing data."
But that first part — digital advertising — drives Reddit's business. It is a trillion-dollar market opportunity, by Reddit's reckoning. But analyst Scott Kessler points to the startup's key challenge.
"There's a big market opportunity, but the question is to what extent can Reddit seize upon it?" Kessler, who is global sector lead for technology, media and telecommunication at Third Bridge, told Investor's Business Daily.
Reddit IPO: Going Up Against Powerhouses
The 19-year-old Reddit plans to trade on the New York Stock Exchange under the ticker symbol "RDDT."
Reddit is not profitable as of its last fiscal year. But the company did show some positive strides.
Reddit posted a healthy 21% revenue growth rate last year as it ramped up its ad sales. Plus, the firm said it is targeting a total addressable market for digital advertising of more than $1 trillion, citing S&P Global Market Intelligence forecasts within its prospectus document.
But competition for that market is fierce, and tilted toward tech's richest and mightiest. Last year, more than half of all digital ad spending went to Google parent Alphabet, Facebook parent Meta and Amazon, as estimated by research firm Insider Intelligence.
Long Winding Road To IPO
Founded in 2005, Reddit's IPO filing follows a long and winding route to the public markets.
Media company Conde Nast acquired Reddit for $10 million in 2006, before spinning the startup back out five years later. Reddit did a confidential file for an IPO in 2021, but a choppy market put those plans on hold.
Reddit last raised private funding in August 2021, at a reported $10 billion valuation. While the company hasn't yet priced its offering, Reddit has been advised to seek a $5 billion valuation through the IPO, according to a Bloomberg report citing sources familiar with the matter.
Reddit's revenue climbed 21% to $804 million for 2023, according to its prospectus. But the company posted a net loss of $91 million, narrowed from $159 million a year earlier.
Reddit said that as of December it had 73.1 million daily active unique users, up 27% from a year earlier.
Reddit's message boards host a stockpile of 1 billion cumulative posts across 100,000 active communities. Topics are organized as subreddits which cover a wide range of topics: from r/TaylorSwift (which has more than 1 million members), r/AskReddit to r/WallStreetBets — which famously powered the meme stock phenomenon of 2021.
Meta Dominates Social Media Ad Spending
Reddit's 21% year-over-year sales growth stacks up well against other social media stocks. Pinterest sales grew 9% last year to $3 billion while Snap's annual sales were flat at $4.6 billion. Of course, those companies are up against a larger overall base of sales.
One company casts giant shadows over the social media ad market: Meta. The Facebook and Instagram parent company's revenue grew 16% to $135 billion in 2023. And despite being so much larger, Meta's 25% sales growth in the final three months of the year significantly outpaced the growth rates for Pinterest and Snap.
These recent results are powering a narrative that it's "increasingly difficult for second and third tier players in the category to gain traction," Third Bridge's Kessler told IBD.
Investors seem to see it that way. Meta stock jumped out to 40% gains in the first two months of the year. Meanwhile, Pinterest stock has traded flat year-to-date while Snap has shed more than 30%.
Beyond social media, Google is still the market leader for overall digital ad sales, according to Insider Intelligence. Plus, as Kessler noted, retail giants such as Amazon and Walmart are increasingly winning ad share.
Can A Reddit IPO Boost Its Ad Business?
Reddit first sold sponsored links in 2009. But it acknowledged in its IPO filing that the company did not begin "meaningful monetization efforts" until 2018. That at least partially explains why the company is still losing money — and remains much smaller than social media competitors.
But Reddit believes the many eyeballs its platform attracts, boosted by the wide range of topics users can explore on the platform, gives it an edge to win ad dollars. For example, "an advertiser can reach people who are in a conversation in r/camping or r/Outdoors exploring what gear they should buy," Reddit wrote in the IPO filing. "These people may see an ad for camping gear, in context, within that conversation. That is contextual advertising. Reddit's unique community structure and interest-driven model acts as a strong signal for advertisers."
Insider Intelligence projected in a January report that Reddit captured less than 1% of all global digital advertising revenue last year. But the research firm also expects Reddit's ad sales will grow about 33% in 2024.
Insider Intelligence analyst Jeremy Goldman pointed to Reddit's strengths. For instance, data suggests that users view Reddit as a trustworthy place for product recommendations. And arriving at a particular subreddit, such as by Google search, can signal intent to purchase a certain product or book a vacation.
To be sure, having users with intent doesn't automatically convert to strong advertising sales, particularly for smaller companies up against Google and Meta, which have larger platforms and more money to invest in AI and other advertiser tools.
In that environment, "You are going to see smaller players forced to monetize in a number of different ways," Goldman told IBD. "You have to essentially zig where the largest players are zagging."
Reddit AI Data Revenue
Reddit's rivals have embraced creative strategies.
Pinterest, for instance, has partnered with Amazon to display the e-commerce giant's ads to Pinterest users. The company recently struck a similar deal with Google. Snap, meanwhile, has a growing subscription product offering premium features.
Reddit, for its part, believes it can boost revenue by licensing the data from its website to train AI models. It took a big step in that regard just before its IPO filing. Reuters reported on Feb. 21 that Reddit reached a deal worth $60 million with Google that will make Reddit content available to train Google's large language models.
It is not exactly Meta-level ad money, but it is a start for a broader market that Reddit believes could reach $1 trillion by 2027, according to its IPO filing. As the company stressed in its filing, Reddit is home to "one of the internet's largest corpuses of authentic and constantly updated human-generated experience."
