Reddit filed with the U.S. Securities and Exchange Commission for an initial public offering in December 2021. SOPA Images/LightRocket via Gett
Reddit’s signal to consider an initial public offering made it one of the most anticipated initial public offerings (IPO) of 2022. The IPO process typically takes six to nine months, but 13 months after announcing its filing, Reddit still isn’t doing stock market.
With stock markets falling over the past year, it doesn’t make sense for a tech company to go public now, said Kyle Stanford, an analyst at Pitchbook. But there are other, structural reasons that could hold the company back.
Reddit is a news aggregation and discussion site popular with Gen Z and Millennials. According to Business of Apps, an app industry publisher, the bulk of Reddit’s revenue comes from advertising. Reddit also sells an ad-free premium subscription for $5.99 per month, which an estimated 344,000 users paid for in 2021, the most recent year the data was compiled.
If Reddit goes public, it needs to show investors it can still make money, said Jamie Cohen, who teaches media and advertising courses at Queens College. The delayed IPO suggests the social media site is struggling with its advertising model, he said. Advertisers are cutting spending due to economic conditions, and companies in the technology and media industries are cutting costs and laying off employees to secure profits.
Reddit earns significantly less than its competitors despite sharing the same advertising model as platforms like Facebook, Instagram, and Snapchat. Reddit’s estimated 430 million monthly active users, called Redditors, don’t mind seeing ads on the platform because they’re not intrusive like ads on other sites, Cohen said. But that could change as ads become more frequent or take up more space, which may be necessary for Reddit to prove to investors that it can grow. “How can you get more ads or ad revenue to appear without upsetting the user base?” asked Cohen.
Reddit users are loyal to the platform, So showing more ads wouldn’t necessarily drive Redditors away, he said. But it could lead to users speaking badly about Reddit on other social media, making it harder for the platform to attract new users.
The site could expand the use of ads that appear in search results and for which advertisers pay more. For example, a New Jersey diner might buy ads that appear when a user searches for “New Jersey restaurants.” These are “smart ads” that aren’t intrusive, Cohen said. Reddit did not respond to the Observer’s interview requests.
Reddit’s value changes with the market
Reddit filed for an IPO in December 2021 and was reportedly targeting a valuation of more than $15 billion, up $5 billion from the last estimate.
In 2019, investors valued the site at $3 billion. That doubled to $6 billion in February 2021 and $10 billion by August, its latest round, thanks to big investments during the pandemic. But it would be surprising if Reddit received such a high rating based on what’s happening in the stock market now, said Needham & Company analyst Bernie McTernan.
Venture-backed companies were valued at 16 times their annual revenue in 2021, indicating high growth potential, said Stanford, the analyst at PitchBook. That has since fallen to valuations three times the sales, he said. “If they had gone public in 2021, they could have gotten a very high multiple,” he said. “Now they definitely can’t.”
Reddit’s fall isn’t uncommon, but it happens to every tech company trying to go public in this economy. No one wants to be first, and Wall Street likely won’t see any new tech stocks in the first six months of 2023, he said.
Reddit’s earnings are a fraction of those of other social media sites. In 2021, the latest available data, Reddit earned $350 million according to Business of Apps. For comparison, Snap made $4.12 billion and Pinterest made $2.58 billion.
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