Reddit recently went public in one of the most anticipated IPOs of the year. But despite early trading success that saw shares surge 48 percent on day one, the company faces major challenges that could affect its future as questions linger about its financial viability and business model.
With its quirky ethos prided as the town square of the modern age and dependence on unpaid volunteers, Reddit has long styled itself as an underdog. But its highly anticipated IPO thrusts the self-proclaimed “front page of the internet” squarely into the spotlight—and the harsh glare of public markets where turning a profit often trumps ideals. Now the question is whether Reddit can maintain its unique identity while convincing investors it is a sustainable business – not just an online curiosity.
Delaying IPO was the ‘right call’ for Reddit
Reddit originally planned to go public in 2021, but postponed its IPO plans amid pandemic-fuelled market uncertainty.
According to Saul Marquez, CEO of digital marketing firm Outcomes Rocket, the decision to delay was “the right call” because it provided the company with an opportunity to strengthen its revenue model and financial performance. This enhanced investor confidence and valuation as their recent IPO showed.
“The decision to delay Reddit’s IPO in 2022 can be attributed to a challenging business climate, uncertainties in the tech sector, and some concerns about the company’s profitability and growth potential,” said Muhammad Shahid Nazir, Partner of Corporate Finance and Deal Advisory at Insights UAE.
“With the benefit of hindsight, this was a prudent move to ensure a more stable and favourable environment for its public offering.”
While Reddit has touted sizable revenue growth, up 52 percent last year, the company has yet to reach profitability after 16 years in business. It lost $524 million in 2021 and nearly $100 million in 2022 even as revenue climbed. This lingering unprofitability despite Reddit’s vast user base raises questions among investors about the viability of its financial future.
The IPO was a success out of the gate. After opening on Thursday, shares topped 48 percent to close at $57.80 after pricing at $34, defying Reddit’s decision to set a conservative IPO price.
“Reddit’s IPO saw strong investor appetite, with shares opening at $47 and reaching a high of $57.80 on the first day of trading, marking a 48 percent increase from the IPO price of $34,” said Nazir.
Reddit’s stock price surged after its initial public offering last week. The shares, which were priced at $34, ended up closing at $59.80 on the first day of trading. This significant increase meant that Reddit and its early backers were able to raise approximately $750 million collectively through the IPO.
One notable beneficiary was Sam Altman, CEO of OpenAI and a former Reddit board member, who invested $200 million in the company and saw the value of his stake swell to over $613 million following the successful debut. Riding high after the opening, Reddit shares then jumped an additional 30 percent on the Monday after its IPO as enthusiastic investors piled into the newly public stock.
The impressive debut trading day points to confidence in Reddit’s potential, although the true test will be whether the company can sustain growth and engage users over the long-term as a public company.
Reliance on unpaid moderators poses existential risk
One of the unique facets of Reddit’s business model is its reliance on unpaid volunteer moderators to manage the platform’s over 100,000 active online communities. While this allows Reddit to operate with minimal labour costs, experts point to the risks inherent in building a platform off the backs of volunteers.
“Reddit’s reliance on unpaid moderators to manage its communities has both positive and negative impacts on the company’s valuation and investor appeal,” said Marquez.
“As the platform continues to grow, there’s a concern that quality may be sacrificed due to the volunteer nature of moderation, potentially impacting user engagement and advertiser appeal.”
Unrest among Reddit’s moderator community poses one of the most significant threats to the company’s operations. In the past, conflicts between Reddit leadership and moderators have led to blackouts where moderators set their communities to private in protest. These blackouts severely disrupted user activity on Reddit.
“These actions can affect the stage’s tasks, and Reddit has recognised that they are expected threats to their organisation and monetary possibilities,” said Nazir.
“The connection between Reddit and its mediators is a significant concern for financial backers, particularly given the stage’s dependence on these workers to oversee the enormous number of gatherings.”
While the platform has touted its large and rapidly growing user base as a key asset, further alienating moderators who act as the backbone of the Reddit community could place the entire platform at existential risk.
This could also extend to Reddit’s longtime users, who have been loyal to the platform for its free speech ethos and idiosyncratic identity. If core users feel disenfranchised by attempts to sanitize content or commercialize the community, it could massively undermine Reddit’s appeal.
“By and large, while Reddit has shown that past fights considerably affected income, financial backers stay worried about the chance of future interferences, which could influence client development, commitment, and the state’s ability to enlist and keep publicists,” Nazir explained.
“Conflicts with moderators and disruptions on the platform could raise concerns for investors regarding Reddit’s corporate governance and community management. Addressing these dynamics is crucial to maintain investor confidence and ensure a stable operating environment.”
Advertiser relationships hang in the balance
In its pursuit to ramp up advertising revenue, Reddit must also grapple with how its controversial content and freewheeling ethos fit with brand strategy imperatives from marketers. This balancing act will have a major impact on the company’s post-IPO success.
“Reddit’s ethos of accepting a diverse range of topics, including contentious ones, can be a double-edged sword in terms of advertiser partnerships and income development,” said Nazir.
Although Reddit has gotten away with its often-toxic content as a private company, experts say it may face more pressure from advertisers to sanitise its forums as a public company.
While the platform’s diverse range of content and active communities provide advertisers with an unparalleled opportunity to reach a large audience, it could put off some advertisers who may be wary of linking their brand with controversial content – or content that does not align with their core beliefs.
According to Marquez, however, conflicts with moderators and user protests, though initially concerning, can potentially pose a major advantage for the platform in terms of advertising revenue growth.
“These incidents often generate significant attention and discussion within the platform, drawing in more users and increasing overall engagement. Higher engagement levels provide advertisers with greater opportunities to reach their target audience and generate increased ad impressions and click-through rates,” he said.
Marquez added that the platform offers advertisers access to niche communities and specific demographics, “allowing for more targeted and effective advertising campaigns.”
While conflicts may present challenges initially, they also present opportunities for Reddit to capitalise on engagement and attract more advertisers.
Offering users shares fosters loyalty – but not value
One of the most talked about aspects of Reddit’s offering was its decision to allow individual users to purchase shares in the IPO through a special Directed Share Program. While allowing users to buy into the company makes for savvy marketing, experts say it does little to boost Reddit’s underlying fundamentals or chances of surviving in the markets.
“Offering users the ability to purchase shares in the IPO is indeed a smart marketing move for Reddit,” said Marquez. “Reddit is demonstrating its commitment to its user community and fostering a sense of ownership and loyalty among its users.”
Nazir agreed with his sentiment. “Reddit’s decision to include users in its IPO reflects a growing trend among companies to democratise access to investment opportunities.”
However, Marquez cautioned that this move was unlikely to impact the tangible value investors place on the company.
“It doesn’t fundamentally impact Reddit’s value or viability,” explained Marquez. “The IPO process remains subject to regulatory requirements, market conditions, and investor interest, unaffected by whether or not users are offered the opportunity to purchase shares.”
The bottom line
While Reddit’s $91 million net loss last year raises concerns over profitability, investors will likely assess its future potential rather than just current finances, said Marquez.
Companies like Amazon have successfully operated at a loss for years before turning profitable. Reddit can follow a similar path by boosting revenue streams through advertising, subscriptions, and e-commerce while expanding its user base.
“While reaching profitability is undoubtedly a priority for investors, they may also be interested in Reddit’s long-term growth prospects and its ability to deliver sustainable earnings in the future,” he added.
As a newly public company, Reddit faces substantial challenges. Its ability to achieve profitability, appease moderators, and strike the right balance between its distinctive culture and advertiser sensitivities will ultimately determine whether the company thrives or plunges in the years ahead.
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