Social media has become an integral part of modern society, and one of its most prominent players, Reddit, has made a big move by filing for an IPO. This eagerly anticipated step will bring the company into the world of public markets, joining a growing list of highly valued technology startups and private entities seeking a path to exit in the coming year.
It was a long and complicated journey for Reddit to get to this point. After being sold as a fledgling company, it eventually found its way back to independence. Now, with over $800 million in revenue projected for 2023, a significant increase from $666.7 million the year prior, Reddit is poised to enter the public markets.
However, despite its impressive top-line growth, Reddit has yet to turn a profit on a GAAP or adjusted basis and continues to rely on cash flow to sustain its operations. Despite its growing user base, Reddit is still grappling with profitability, which could impact its potential valuation when it finally goes public. In 2022, the company reported a net loss of $158.6 million and a negative adjusted EBITDA of $108.4 million. While these figures did improve in 2023, with a net loss of only $90.8 million and negative adjusted EBITDA of $69.3 million, Reddit’s free cash flow still remains in the red, albeit showing some improvement from -$100.3 million to -$84.8 million in the same timeframe.
But there may be a silver lining for Reddit. In the last quarter of 2023, the company not only reached a record high in revenue with $249.8 million, but also turned a profit of $18.5 million. While this is an encouraging development, it’s worth noting that even with a positive GAAP profit, Reddit’s free cash flow still ended in the negative at -$22.0 million for the quarter.
Reddit raised over $1 billion in private funding, including a $410 million Series F round in 2021 and a smaller $368 million Series E round earlier that same year. These investments propelled Reddit’s valuation to $6.4 billion and approximately $10 billion, respectively.
However, with its upcoming IPO, Reddit’s bubble-era valuations will be put to the test. But this public debut is not just a test for the private-market valuations of startups. Reddit is shaking things up by announcing plans to reserve a portion of its shares for 75,000 of its users. This unique approach, typically reserved for large investors, has raised eyebrows and piqued interest.
Coinciding with this bold move, Reddit also recently reached a deal with Google that will allow the search giant to access its data. This deal, reportedly worth around $60 million per year, could potentially contribute to a significant portion of Reddit’s revenue in 2024, possibly accounting for 7.5% of its total revenue in 2023.
In fact, if Reddit is able to secure similar partnerships with other major AI model providers such as OpenAI, it could see a sizable increase in revenue from new sources, and capitalize on the current AI wave with high profit margins. In its S-1 filing, Reddit also mentioned plans to license its data to third parties for search, analysis, and display purposes. This additional revenue stream could be attractive to investors looking for a growth story.
Despite its unprofitability, Reddit knows its strengths – its user base. The daily active unique user (DAU) count grew by 27% in the last three months of 2023, an impressive feat for a platform that has been around for a decade. In December 2023 alone, Reddit had over 500 million visitors and an average of 73.1 million daily active users globally.
In terms of revenue growth, Reddit sees a big opportunity in advertising. With only scratching the surface of using machine learning and prediction models to better match supply and demand, Reddit believes it can significantly increase its ad revenue. This also aligns with the overall trend in the technology world, with companies like Meta and Amazon reporting strong ad income growth in their earnings. In addition to traditional display and video ads, Reddit also sees potential in social direct response and search advertising, estimating its total addressable market to be a staggering $1.4 trillion, excluding China and Russia.
Although Reddit has a different business model compared to enterprise SaaS companies, a successful IPO and strong early trading performance could potentially lure other late-stage, private-market tech companies to follow suit. This would not only please venture capital reporters hungry for data, but also provide a much-needed boost of public-market liquidity for venture investors holding on to unrealized returns.
