Reddit's IPO raises questions about profitability. Here's how it makes money.

By James Rogers

Founded in 2005, Reddit is not yet profitable, but has big plans to drive profit following its IPO

Reddit's forthcoming IPO has raised the question of how the social-media platform makes money and plans to turn a profit.

The company is expected to price its IPO on Wednesday and begin trading on Thursday. The stock will trade under the symbol RDDT on the New York Stock Exchange.

Reddit's total revenue was $804 million in 2023, an increase of 21% from 2022. However, Reddit is not yet profitable, something that has come under scrutiny in the run-up to its IPO.

The company's total costs and expenses in 2023 were $944.19 million, up from $838.86 million in the prior year, driven by increasing research and development and sales marketing costs.

Related: Post-IPO, Reddit will still be the 'quirky goth kid' to Google and Facebook's 'varsity quarterbacks'

In a letter that accompanied Reddit's S-1 filing, CEO Steve Huffman described advertising as the company's first business. "Advertisers of all sizes have discovered that Reddit is a great place to find high-intent customers that they aren't able to reach elsewhere," he said, adding that advertising on Reddit is rapidly evolving.

Reddit offers a unique platform for advertisers, according to the filing, citing its strength in contextual and interest-based advertising. The company plans to grow this business by adding more "contextual and interest-based signals and intelligence" into its advertiser platform. Reddit is also harnessing machine learning and prediction models to better match advertiser supply and demand, it said, as well as increasing the types, sizes, and geographies of advertisers it reaches.

The good news is that Reddit's IPO comes at a time when the digital-advertising industry is experiencing a strong resurgence, according to Ido Caspi, a research analyst at Global X ETFs. "There are major advertising events like the upcoming Summer Olympics and U.S. presidential election on the horizon, alongside a more favorable macroeconomic environment," he told MarketWatch last week.

Invest in what you know: Reddit moderator who saw meme-stock craze is buying into platform's IPO

Commerce and data licensing will also feature prominently in Reddit's future. In its S-1, the company says it is in the early stages of allowing third parties to license access to search, analyze, and display historical and real-time data from its platform. "Reddit is one of the internet's largest corpuses of authentic and constantly updated human-generated experience," the company said.

The social-media platform has already announced early data-licensing arrangements with contract values over $200 million, as well as a deal with Alphabet Inc. (GOOG) (GOOGL) to enable Google's AI products to leverage Reddit data, Global X ETFs' Caspi said.

Related: Reddit could use this strategy to 'monetize aggressively' following its IPO

Google and Reddit have a longstanding relationship, which they deepened last month with a new cloud partnership. The two companies announced that Google now has access to the Reddit Data API, which will give the search giant access to "fresher" information.

Reddit has been touting the importance of artificial intelligence in its future, noting that its content could be used to feed AI and large-language models. The social-media platform counts OpenAI Chief Executive Sam Altman among its investors.

"Reddit's move to utilize AI as an alternate monetization lever indicates a unique emerging opportunity at the disposal of social platforms dense with user data and engagement to continue to boost their revenue and profitability," Caspi said. "This likely signals a new phase in leveraging social-media assets beyond traditional advertising, and we're excited for the possibilities this presents for the industry."

Related: Why Reddit is 'walking a tightrope' with its IPO

However, there are concerns that Reddit could find itself at odds with its vast army of users as the company strives for profitability.

"They are walking a tightrope, 100%," Jon Keidan, founder and managing partner of venture fund Torch Capital, told MarketWatch earlier this month. "The Reddit fans love Reddit. They are pretty dynamic, they are very protective of their community and they are protective of their platform," Keidan said. But a scenario could arise whereby the public markets force Reddit "to make proper financial and strategic moves" to get to profitability, he added, which could put the company at odds with its user community.

Reddit is inviting the users and moderators who have contributed to the social-media platform to buy shares in its IPO.

Related: Reddit's offering marks return of 'junk stock IPO,' New Constructs says

"If that audience doesn't like what Reddit is doing, it could be a mass exodus of users," Keidan said. "Or it could be a mass manipulation of the stock."

-James Rogers

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03-20-24 1531ET

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