Site icon Accelerating Commerce Ventures

What Reddit’s IPO Filing Reveals About Its Ads Business

Reddit’s long-anticipated plan to go public is finally coming to fruition.

The social network is expected to IPO next month under the stock ticker “RDDT.” The company was valued at $10 billion at the end of its Series F funding round in 2021, however it’s been advised by investors to consider a valuation of $5 billion at IPO. It has raised roughly $1.3 billion across 10 funding rounds since it was founded in 2005.

But how does Reddit make money? Advertising, advertising and advertising.

The company’s S-1 filing with the SEC provides insights into the intricacies of Reddit’s ads business and its strategy for becoming “the leader in contextual advertising.”

Let’s dive in.

Advertising first

“Advertising is our first business,” Reddit CEO and Co-Founder Steve Huffman wrote in his letter to investors.

Reddit generates “substantially” all of its revenue through the sale of advertising on its mobile apps and website. The majority of its ad impressions were in app last year.

It operates its own ad platform and runs its own ad auctions that advertisers can bid into on a cost-per-impression, cost-per-click or cost-per-video-view basis. In Q4 2023, 88% of Reddit’s ad revenue came from auctions as opposed to direct deals.

Its top-performing ad verticals in Q4 included technology, finance and media and entertainment, which together accounted for 52% of ad revenue. During the same time frame, 50% of ad revenue came from performance campaigns, rather than branding campaigns.

On the direct sales front, 65% of Reddit’s Q4 revenue came from Fortune 500 companies, whereas 30% of its overall Q4 revenue came from mid-market and small- to medium-sized businesses.

Subscribe

AdExchanger Daily

Get our editors’ roundup delivered to your inbox every weekday.

All in on contextual

In terms of targeting technology, Reddit introduced a contextual tool last June that relies heavily on natural language processing to parse user-generated content for interest-based keywords.

Reddit also has its own third-party pixel (called the Reddit Pixel) for tracking off-platform user behavior.

But despite the large amount of first-party behavioral data Reddit has on its logged-in user base, it’s putting all its eggs in the contextual basket.

“The foundation of our ad performance is based on context and interest instead of tracking users based on personally identifiable information,” the filing says. “Our lack of reliance on third-party data makes our offering more resilient to the loss of signal that other platforms rely upon as well as forthcoming changes to the internet ecosystem.”

Revenue and losses

Last year, Reddit earned just over $804 million in revenue, which was a 21% YOY increase driven by a jump in impressions from daily active unique users. In Q4, Reddit claimed an average of 73.1 million daily active uniques.

However, Reddit also reported overall losses of $90.8 million last year.

Profitability has long been a problem for Reddit, but it’s managed to rein in its losses somewhat compared to previous years. Its revenue for 2021 was $485 million with a $128 million net loss, and in 2022, it earned $667 million with a $159 million net loss.

Reddit could turn its fortunes around as it opens up a new revenue stream from licensing its first-party data to third parties for advertising purposes as well as to train generative AI large language models, according to its filing.

And Reddit is already making good on part of that plan. On Thursday, it announced a $60 million annual deal to license its content for Google’s AI models.

Risk assessment

But Reddit also admits it’s in the early stages of monetization “and there is no assurance we will be able to scale our business for future growth.” It calls out its own history of net losses and concedes it “may not be able to achieve or maintain profitability in the future.”

And it highlights several vulnerabilities of its ads business, such as revenue being subject to fluctuations in user engagement and search traffic.

International expansion is also a question mark for any ad-based business given the restrictions that regulations, including GDPR in Europe, have placed on targeted advertising and the use of consumer data. Reddit is no exception.

The company concedes it may face hurdles as it pursues international growth, and admits both its domestic and international business is “subject to increasingly complex and evolving laws.” That’s putting it mildly.

Not to mention that Reddit’s attempts to be transparent about its data use as it goes public could expose it to legal or ethical liabilities.

According to the filing’s risk assessment, Reddit “anticipate[s] that our ongoing efforts related to data privacy, safety, security and content review will identify instances of misuse of user data or other undesirable activity by third parties on our platform.”

That’s just the risk companies face in going public!

link

Exit mobile version