OPINION

Updated February 23rd, 2024 at 16:30 IST

Reddit’s future looks bright through VR goggles

Like Snap, Reddit hasn’t figured out yet how to fully monetize its users through advertising.

Anita Ramaswamy
Reddit | Image:Unsplash
Advertisement

Reality check. Social media firm Reddit is finally gearing up to go public. The company, which is almost the same age as the $1.2 trillion Meta Platforms, is seeking a mooted price of at least $5 billion in its upcoming offering, a piddly 0.4% of Meta’s market capitalization. Based on its current business model even that seems a stretch. Yet founder Steve Huffman has a few aces up his sleeve.

As far as technology companies go, Reddit’s not doing too terribly if viewed through the lens of growth. Sales jumped a fifth in 2023 compared to the prior year. Daily active users were up 27% to 73 million, which includes those without full-fledged logins who visit the site to poke around. Reddit has roughly a fifth of the daily users who are on $18 billion disappearing-messages app Snap. Neither is comparable to Meta in terms of size. But with losses narrowing, too, Reddit appears to check the necessary boxes.

Advertisement

Based on Snap and another social peer, Pinterest, the price Huffman may be seeking might not look crazy on first blush. Assume Reddit expands its top line by another 20% in 2024 from the $804 million it bagged last year. Rival social media firm Snap is worth 3.5 times next year’s sales, according to LSEG, while Pinterest is worth 5.7 times. At the midpoint between the two, Reddit would be worth roughly $4.5 billion.

The trouble is that, like Snap, Reddit hasn’t figured out yet how to fully monetize its users through advertising. While losses shrank from last year, it is far better to be profitable before going public. Dig a little deeper, and there are cracks. Based on the most recent quarter, each user brings in roughly $3.42 to the top line, about as much as Snap, whose shares have lost 34% so far this year. Meta, whose stock has risen 40%, inks more than $12 per user.

Advertisement

Huffman has plans to expand how he makes money, including peddling Reddit’s trove of user-generated content to AI model-makers. Keyboard warriors have generated more than 16 billion comments across forums dedicated to topics ranging from “wholesome memes” to interior design. In its filing, Reddit says such data is valuable. Indeed, a Reuters report this week said the company inked a deal to sell some of its content, worth $60 million annually, to search giant Alphabet.

The challenge is that without a good sense of how much this nascent revenue stream will bring in, investors would be wise to value Reddit based on its track record than what it could look like in a yet-unrealized world.

Advertisement

Huffman’s firm knows how to create buzz, which ultimately may push him over the line. But buyers of Reddit shares will need to put on their virtual reality goggles to get it there.

Advertisement

Published February 23rd, 2024 at 16:30 IST