“American post bar” Reddit will become the leader in IPOs in the technology industry this quarter.
On February 22, Reddit released its prospectus. The report shows that in 2023, the company's revenue reached US$804 million, a year-on-year increase of 21%, and its gross profit margin was 86%. The net loss in 2023 will be reduced from US$159 million to US$91 million, and the loss will continue to narrow. Cutting losses is an important step toward becoming profitable, although Reddit has yet to report a profit.
Additionally, Reddit decided to sell a “significant” number of shares to retail investors and Reddit platform users. Reddit believes that its users are not only users of the platform, but also form a core part of the company's value. By allowing users to participate in the company's equity, it strengthens users' sense of belonging to the platform. The company will list on the New York Stock Exchange early next month under the ticker RDDT.
Reddit's prospectus shows that Reddit's huge conversation data and knowledge base are particularly important for AI, especially as it is the basic material for training many leading large-scale language models. And Reddit has cooperation and cross-investment with technology giants. For example, Altman holds a 5% stake in Reddit, and Google also uses Reddit posts to train its AI model.
Reddit partners with tech giants
Reddit said OpenAI CEO Sam Altman owns more than 5% of Reddit through entities related to him. At the time of the 2021 financing, Altman was a member of Reddit's board of directors.
Reddit was valued at $10 billion in its last private financing round in 2021, but some investors have since slashed its valuation by about 50%. But Reddit's operating income is still growing steadily. According to the prospectus, Reddit's sales will reach US$804 million in 2023, a year-on-year increase of 21%.
Reddit's sales revenue growth mainly comes from advertising. As a platform once considered a bastion of free speech, Reddit has had to more tightly police content on its platform in recent years in order to create a safer and more engaging environment for advertisers.
In addition to advertising, Reddit is also looking to diversify its revenue, such as by charging third parties for data access, partnering with tech giants such as Google, and formalizing marketplace transactions between users.
On Thursday, Reddit announced a deal with Google that will "pioneer new ways for Reddit content to be displayed across Google products" while allowing Google to use Reddit posts to train its artificial intelligence models. According to media reports, the deal is worth approximately $60 million per year. Not only does this bring significant revenue to Reddit, it may also increase the visibility and influence of Reddit content, while supporting Google's development in the field of artificial intelligence.
In addition, Reddit is exploring how to generate revenue from transactional activities on its platform, such as users buying and selling sneakers in certain communities, editing or transforming photos, etc. After the service is completed, the user who issued the request will pay a certain fee to the user who provided the service.
The prospectus revealed that as of December 31, 2023, Reddit had more than 1 billion posts and more than 16 billion comments, and ranked among the top ten most visited websites in the United States in December 2023. Reddit content is particularly important for AI, especially as it is a fundamental part of how many leading large-scale language models are trained.
Additionally, Reddit uses models built and trained in-house to improve many aspects of Reddit, including user onboarding, content translation, and moderation and security. Reddit's vast conversation data and knowledge base make the company unique, and Reddit believes its value will continue to grow over time as user-generated data continues to grow.
Reddit raises money from forum users
Reddit mentioned in its prospectus that the platform has 267.5 million weekly active users spread across more than 100,000 subreddits. These subreddits cover almost everything from entertainment to technology to personal finance.
The most famous subreddit is the WallStreetBets trading forum, which is famous for triggering stock market shocks by prompting retail investors to collectively buy retail concept stocks such as GME, highlighting the influence of social media in financial markets.
Reddit co-founder and CEO Steve Huffman expressed his emphasis on community in the prospectus:
"It is hoped that taking the company public will bring meaningful benefits to its community."
Reddit said it will allocate shares to Reddit users through a "directed stock program" and plans to attract a wider range of retail investors to participate in its IPO by selling shares through popular personal investment management apps such as Robinhood and SoFi. Reddit recognizes that its users are not just users of the platform, but form a core part of the company's value. By allowing users to participate in the company's equity, it strengthens users' sense of belonging to the platform.
Huffman also emphasized that Reddit users have a deep sense of belonging to the communities they create, and that users' sense of ownership in the communities they create often extends to the entire Reddit platform. On Reddit, users not only consume content, they create and maintain communities. This sense of ownership is a key aspect of Reddit's culture, making users feel they have direct input and influence on the platform.
Analysts believe that Reddit is going public not only to raise funds and expand its business, but also to deepen its ties with its user community, recognize users' contributions to the platform, and give them ownership in the form of actual equity. This approach may further incentivize user participation and investment, thereby enhancing community vitality and engagement.
However, Reddit also warned in its prospectus that allowing an unusually large number of retail investors to participate in the listing may increase stock price volatility and potentially replicate the "retail concept stock" price behavior that saw Robinhood's stock price briefly jump shortly after its listing in 2021. If the stock price rise is primarily due to a short-term trading frenzy rather than support from the company's fundamentals, then this high price may not last and the stock price may decline over time.
Reddit first filed a confidential version of its prospectus more than two years ago, but its plans to go public were stymied by rising interest rates and falling valuations of technology stocks. However, market activity has been picking up in recent months as markets anticipate a peak in the rate hike cycle and U.S. stock indexes hit record highs. Companies like Reddit are looking for moments like this to achieve their IPO goals.