Reddit IPO: S1 Breakdown
A social media giant goes public
Key Figures
Revenue: $804M in FY23, +21% y/y
Daily Active Users: 76.1M, +27% y/y
Average Rev per User: $3.42, -2% y/y
Gross Margin: 86%, +2% improvement
Net Loss: ($90.8M) in FY23, an improvement from ($158.6M) in FY22
Adj. EBITDA: ($69.2M) in FY23, an improvement from ($108.4M) in FY22
Current Cash: $1.3B
5 Key Themes:
Narrowing losses: If you stand on your head and squint your eyes, they achieved positive Net Income and positive adjusted EBITDA in the 4th quarter of 2023. The path to sustainable profitability goes through R&D spend, which was 54% of revenue in 2023.
Don’t take your eye off revenue per user: Declined by (2%) y/y, which could either be a reflection of advertising seasonality, macro conditions (are people going outside more?), or a negative leading indicator of future ad revenues.
Not a software company: Def a social network, absolutely an advertising juggernaut, and maybe a data platform?
Competing in two arenas: Reddit competes for both Attention (eyeballs) and Advertisers (publishing budgets)
Riding the AI wave: With 98% of their current revenues tied to advertising, they aim to diversify their topline through data licensing agreements for training large language models. Coincidentally, they announced a deal with Google right around the time of the S1 drop, which entails $60m a year in licensing. That’s a start!
Valuation, Investors, and Ownership
Valuation:
Last Valuation: $10B
Estimated Valuation at IPO: $5B to $7B
Est. Raise: $750M
Notable Investors:
Former CEO Sam Altman (yes, the OpenAI guy) owns 8.7%
Current CEO Steve Huffman owns 3.3%
In 2006, Huffman and his co-founder, Alexis Ohanian, sold Reddit to Condé Nast for $10 million
They sold off most of their shares before hitting the road in 2009
Huffman returned, and was able to recapture some ownership
CFO Andrew Valero owns 1.7%
He came over after taking SNAP public; he’s got the social media IPO playbook
COO Jennifer Wong owns 1.5%
Rare for a COO (and also a CFO, for that matter) who were not cofounders to still have this much skin in the game. Good for ya’ll!
Institutional Investors over 5% include:
Tencent (Chinese Conglomerate)
Vy Capital (based in UAE)
Advance Magazine Publishers (Conde Naste’s holding company)
Ticker
They’ve applied to be listed under the ticker RDDT on the NYSE.
Bankers
Morgan Stanley secured the coveted lead left position, entitling them to the highest economics, followed by Goldman and JP Morgan (who are notably called out as listed in Alphabetical order, LOL).
Origin Story
Reddit's origin story began in 2005 as a single large community where users from across the internet could gather to find a sense of belonging, share interests, and discuss their passions. As the platform's user base and the variety of topics discussed grew, Reddit recognized the opportunity to better facilitate the formation of more tailored communities. This led to the introduction of subreddits in 2008, which are communities organized around specific interests, and resulting in more specific segmentation of it’s users (great for advertising!)
As of December 2023, Reddit's scale is vast, averaging 73.1 million daily active users globally, continuously contributing to an ever-growing archive of human information and interaction.
Reddit's infrastructure is likened to a city with over 100,000 unique neighborhoods (subreddits), each with its own culture, slang, vibe, sense of humor, and rules, both written and unwritten. These communities are not created by Reddit itself but by its users, who also take on roles such as moderators to help keep these spaces safe, vibrant, and true to their essence (free labor?).
Reddit's role is to develop and maintain the common infrastructure that keeps this "city" secure, thriving, and open for growth, reflecting the dynamism and diversity of its user-generated content and interactions (which has been done to varying success).
How they make money:
Reddit profits from eyeballs, mean comments, and teenage angst.
For the year ended December 31, 2023, Reddit's revenue can be disaggregated into two buckets:
Advertising Revenue: $788,782,000
Other Revenue: $15,247,000
Reddit generates 98% of its revenue through third-party advertising. The company's advertising revenue is mainly derived from a small number of advertisers, with the top ten largest customers accounting for approximately 28% and 26% of its revenue for 2022 and 2023, respectively.
Advertising revenue is recognized when a user clicks on an ad contracted on a cost per click (“CPC”) basis, views an ad contracted on a cost per thousand impressions (“CPM”) basis, views a video ad contracted on a cost per view (“CPV”) basis, or on a fixed fee basis, based upon ad delivery over the service period, which is typically less than 30 days in duration.
Perhaps most interestingly, Reddit is now selling a story built on monetizing the data on the platform, as it’s ingested by large language models for learning purposes. Via bespoke data licensing arrangements, Reddit provides customers with access to data from its platform, recognizing revenue as partners consume and benefit from the licensed data, typically over the license period.
“We are in the early stages of allowing third parties to license access to search, analyze, and display historical and real-time data from our platform”
There is a small B2C recurring component, linked to user Reddit Premium subscriptions, which are recognized ratably over the subscription period (generally less than one year). Products within the user economy include Reddit Gold and Collectible Avatars, although revenue from these sources was not material for the years ended December 31, 2022, and 2023. People love badges.
Where they make money:
For the year ended December 31, 2023, Reddit's revenue mix by geography, based on the billing address of the customer, was as follows:
United States: $651,378,000
Rest of the World: $152,651,000
81% of Reddit's revenue is generated from the United States, with the rest of the world contributing 19%. No individual country outside the United States represented 10% or more of total revenue during the years ended December 31, 2022, and 2023.
Expansion Opportunities
Reddit identifies multiple expansion opportunities for market share and revenue growth across different facets of its business model:
Advertising: More advertising in more countries and across more specific cohorts of users as new Subreddits emerge.
Data Licensing: The value of Reddit's data for sentiment analysis, trend identification, and training Large Language Models (LLMs). And more Google dollars.
User Economy: Helping creators be successful. This one’s a bit harder to buy into, as there aren’t a ton of “creators” on Reddit today, and businesses concentrated on the creator economy have struggled to find scale, due to the power law dynamics at play.
Competitors
Reddit competes in two arenas: Eyeballs and advertisers.
“We are competing for people’s time and for global advertising spend.”
You know what they say - if it’s free to you, then you’re the product.
In terms of competing for people’s time, here's a summary of competitors by category as identified by Reddit:
For Seeking Information—Google, Amazon, YouTube, Wikipedia, X, and other news sites. Some users are also turning to LLMs such as ChatGPT, Gemini, and Anthropic.
For Entertainment—Meta (including Facebook, Instagram, Threads, and WhatsApp), YouTube, Snap, X, TikTok, Roblox, and Twitch.
For Passions and Hobbies—Facebook Groups, Discord, X, and Pinterest.
For Peer-to-peer Commerce and User Economy—Facebook Marketplace, Nextdoor, Craigslist, Poshmark, Etsy, and Roblox.
And they also compete for publisher spend. This includes Google, Meta, Snapchat, TikTok, Pinterest, and X. Large ad buyers and publishing HQs are making concentrated bets across various media formats.
Key Metrics and Definitions:
Reddit is not a SaaS company. They are a social network, and in many ways, a data platform. Since the majority of their revenue is not recurring in nature, and linked to advertising, they focus on user activity to measure and predict the velocity and health of the underlying business.
Daily Active Unique users (DAUq) and Average Revenue per User (ARPU) are critical measures.
Daily Active Unique. We define a daily active unique (“DAUq”) as a user whom we can identify with a unique identifier who has visited a page on the Reddit website, www.reddit.com, or opened a Reddit application at least once during a 24-hour period. We calculate average DAUq for a particular period by adding the number of DAUq on each day of that period and dividing that sum by the number of days in that period. We measure DAUq because we believe that this metric helps management and investors understand usage of and engagement with our platform. DAUq is the primary metric by which we measure the scale of our active user base.
DAUq has grown for more than eight consecutive quarters. However, as you’ll see below, the ability to monetize on a per user basis has varied with click through rates and seasonality of advertising revenue.
During the three months ended December 31, 2023, ARPU was $3.42, a decrease of 2% compared to $3.49 for the prior year period
United States ARPU was $5.51, compared to $5.92 for the prior year period.
Rest of world ARPU was $1.34, compared to $1.30 for the prior year period.
ARPU: Average revenue per unique (“ARPU”) is defined as quarterly revenue in a given geography divided by the average DAUq in that geography.
And not all users are created equal - those in the US can be monetized at a higher rate than the rest of the world:
And there’s certainly seasonality at play:
Our ARPU reflects the seasonality of our advertising revenue, with the fourth quarter typically being the strongest quarter of each year, especially in the United States, our most developed geography. United States ARPU is higher primarily due to the relative size and maturity of the U.S. digital advertising market, a dynamic we expect will continue for the foreseeable future.
Financials
Gross Margin
They have an excellent gross margin, coming in at 85% 2023.
Here are the costs associated with their revenue delivery:
Hosting and web infrastructure
Advertisement measurement services
Credit card processing
Customer support
OPEX
R&D is nearly a third of their costs, followed by S&M
Friend of the newsletter
points out:Research & Development (R&D) - Reddit spent $438M (or 54% of revenue) on R&D. This is REALLY high relative to their growth of just 20%. While Reddit is not a software company, Reddit spends the second highest on R&D as a % of revenue than any other public software company.
Reddit increased R&D spend by as much as revenue growth in the past year (20%). Doesn’t appear to be getting much leverage on its operating expenses yet…
You can tell from their quarterly income statement that their R&D percentage of revenue is starting to decline but it is still really high. Reddit either needs to show they are going to accelerate revenue growth from the R&D investments or it needs to be cut way back.
Profitability
Adjusted EBITDA was positive in the 4th quarter for the first time. But they really lost $22M on a FCF basis, meaning they are still burning actual cash.
And like most tech companies, they’ve got a lot of stock based comp in there. You can debate in the comments if that’s real or not.
Adjusted EBITDA is defined as net income (loss) excluding interest (income) expense, net, income tax expense (benefit), depreciation and amortization, stock-based compensation expense and related taxes, other (income) expense, net, and certain other non-recurring or non-cash items impacting net income (loss) that we do not consider indicative of our ongoing business performance.
Miscellaneous Stuff of Note
This is the first social media IPO since Pinterest in 2019
Alexis Ohanian (you know, the guy married to Serena) does not appear to be on the cap table anymore (or at least not in a big way)… he’s also not mentioned in the filing 🤷♂️
Moderators get to participate in a direct share program (DSP)
This is an opportunity for them to get some skin in the game and hold some coveted shares pre-pop
Remember that whole strike about moderators wanting to get paid?
Steve Huffman (CEO) will get a huge payout if the company gets above $5B in market cap… like over $100 million in comp… whew!
In addition to the RSUs described above, 662,447 PRSUs held by our Chief Executive Officer, Steven Huffman, are eligible to vest upon the company attaining a $5.0 billion market capitalization valuation, which could occur as early as the tenth consecutive trading day following this offering.
The exec staff gets minimally 12 months of base pay and share vesting if they are terminated (very employee friendly terms)
We have entered into change in control and severance agreements (each, a “Severance Agreement” and together, the “Severance Agreements”) with each of our named executive officers, which supersede and replace all existing change in control and severance benefits for them.
What’s Next?
Reddit is expected to go public sometime in March of this year. Their execs are probably riding around in a jet as we speak doing the two week roadshow where they hype up the company to perspective investors.
Stock price yet to be announced, which will set the bar for their initial valuation
While this isn’t a “down the middle” tech IPO, it could clear the way for traditional SaaS fast followers
My Take
Reddit’s growth rate (~20%) isn’t world beating. And they’re still burning a good whack of cash on an annual basis.
They’ve grown partially on the backs of free labor (moderators) who have proven they are willing to turn heel. Community volatility, in general, is an existential risk that needs to be factored in.
Their revenue is extremely concentrated around one time ad dollars. The lack of repeatability should be discounted. They should not get a SaaS forward revenue multiple, as their revenue is less predictable and less durable.
There will most likely be a premium on day of IPO due to the pent up demand for ANYTHING new to invest in.
Factoring in all of the above, I think you’ll have time to watch them perform for a few quarters and buy in at around the same price (or even less) once the hype and dust settles… and see if they can get a few more big AI licensing deals in the door… Or you can just buy SNAP.
Not investment advice. I write this while eating ice cream with my dog Walter in the Cullivers parking lot. Do your homework.
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Run the Numbers
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The 3 eras of CFO requirements
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Challenging the problem, not the person
How the most valuable skill CFOs can learn is communication, but they don’t teach that in school,
The leadership SECS talk
Much more
Quote I’ve Been Pondering
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