Reddit has curbed its own enthusiasm
Spending needs to decrease for the niche social network to be valuable to marketers.
Last week, the 18-year-old social media platform revised its initial public offering documents to reflect its intention to sell 22 million shares at a price range of $31 to $34. That equates to a potential market cap of $6.4 billion, which is 36% lower than the $10 billion valuation Reddit achieved in its most recent round of private fundraising in August 2021. It has been rumored that later this week, Reddit will begin its initial public offering (IPO) roadshow in preparation for next week’s listing on the New York Stock Exchange.
With few large initial public offerings (IPOs) and a robust tech stock market, the timing couldn’t be better. In comparison to the Dow and the S&P 500, the Nasdaq Internet Index has outperformed during the previous three months, increasing nearly 13%. Meta Platforms, parent company of Facebook and Instagram, was a major driver of this increase. The firm experienced a rapid recovery in ad income in 2023 while also implementing significant cost savings. Meta’s stock price has nearly tripled in the last year, and it has soared 22% since the company reported its most recent profits six weeks ago.
Reddit, which only has around 2% of Meta’s daily users and is still losing money and burning cash annually, has its shortcomings when compared to a social network that has 40% of the world’s population checking in daily. Social media advertising now appears to be a cutthroat industry due to the recent growth issues encountered by Snap, Pinterest, and Nextdoor.
That is not the case, according to advertising expert Brian Wieser, who points out that niche companies have always found a way to compete with the big boys. “If you can do what you do exceptionally well and operate from the assumption that you are a niche player, you can succeed,” he said.
Some people just can’t seem to wrap their heads around that. Snap, the parent company of Snapchat, continues to incur annual operational expenses that consume 84% of its revenue, even after seven years after going public. Before Elon Musk converted Twitter into X and took it private in late 2022, operational expenses amounted to 66% of revenue during the 12-month period preceding the shift. When compared to the twelve months preceding their respective listings, Reddit devotes a larger percentage of its yearly revenue—55%—to R&D than Snap and Twitter did.
The parent company of Facebook has been extremely lucrative ever since its debut and has maintained this profitability despite overhiring and losing billions on the “metaverse.” As a result, rival social-network businesses have struggled to compete with Facebook. Because most of the material on Reddit is text-based rather than image- or video-based, the site has reduced hosting expenses, which allows for larger gross margins and other cost advantages. It also has a modest but growing data licensing business that provides AI companies with the data they need to train their massive language models. In his “base case” scenario, Reddit’s analyst Dan Salmon from New Street Research predicts that this lucrative source might generate 32% of the company’s overall income by 2027.
For that to occur, a lot of things must still line up. Additionally, Reddit will soon face the challenge of a volatile market that has been particularly hard on digital companies with less-than-perfect financial records. Investors were disappointed with Snap’s most recent quarterly report, which caused a 32% drop in share price, and Pinterest’s share price dropped 16%. Analysts are concerned about increasing competition and the sustainability of Instacart’s advertising business, which has caused its share price to fall 18% since its initial public offering (IPO) day about six months ago. However, shares have surged since the company’s most recent report.
At least Reddit has a better starting position with a reduced valuation from its last private marking. Additionally, Pinterest’s stock would trade at a multiple of around 6.7 times trailing sales if its proposed IPO price range were to be fully implemented. This multiple is approximately half of what Pinterest’s listing price is in 2019. To prove it can make a killing in its social media niche, Reddit still has some work to do. If the company starts with a reasonable price, it might get some much-needed votes.
