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Social media giant Reddit filed to go public today. Its long-awaited S-1 filing will see it approach the public markets potentially at the head of a long column of richly valued technology startups and private companies that need to find an exit this year.

The timing of Reddit’s IPO is not a surprise.

The company’s got a long and tangled history. It was sold in its infancy, only to be later spun back out. Today Reddit approaches the public markets with more than $800 million worth of revenue in 2023, up from $666.7 million in 2022.

However, the company remains unprofitable on both a GAAP and adjusted basis, and continues to consume cash to fund its operations. Scale has not yet solved the profitability question for Reddit, which could limit its potential valuation when it does list its shares.

In 2022 Reddit generated a net loss of $158.6 million, and adjusted EBITDA of negative $108.43 million. In 2023 those figures improved to a $90.8 million net loss, and $69.3 million worth of negative adjusted EBITDA. The company’s free cash flow improved from -$100.3 million to -$84.8 million over the same timeframe.

The company may be making progress towards stemming the red ink that is missed in its annual figures. In the final quarter of 2023, Reddit not only posted what was at least a local maximum in revenue terms – $249.8 million – but also a net profit of $18.5 million. While the GAAP profit is notable for the fourth quarter, the company’s free cash flow was still negative in the period, ending the three-month period at -$22.0 million.

Reddit raised more than $1 billion while private, according to Crunchbase data. That figure includes a massive $410 million Series F raised in 2021 and a smaller $368 million Series E raised earlier the same year. The Series E pushed Reddit’s valuation to $6.4 billion, while its Series F took it to a roughly $10 billion valuation.

Both of those bubble-era valuations will be tested in Reddit’s now quickly forthcoming IPO. But the company’s debut will be more than a test for certain private-market startup valuations. Reddit is reportedly trying something novel in its own flotation.

An IPO with a twist

In what is broadly viewed as an unorthodox move, Reddit reportedly plans to reserve an undetermined number of shares for 75,000 of its users, according to the Wall Street Journal, which cited people familiar with the matter. Those users will be given the chance to scoop up shares of Reddit at its IPO price before the stock even begins trading – something typically reserved only for large investors.

Tailwinds

Reddit’s IPO filing comes at an auspicious time. Reuters reported that Reddit has reached a deal with Google to allow the search giant to use its data. The publication pipped the deal’s value at around $60 million per year. That makes it worth roughly 7.5% of its 2023 revenue, a very nice tailwind for its 2024 results.

If Reddit is able to secure similar deals with other major AI model providers like OpenAI, it could see its revenue base expand from new sources this year in a manner that could undergird its first few quarters’ results as a public company.

Reddit is known to be a key source of data for LLMs, which could give the social media company a way to monetize from the current AI wave at very high gross margins.

In its S-1 filing, the company said that it is in the early stages of giving third parties the ability “license access to search, analyze, and display historical and real-time data from our platform.” Investors love a growth story, and Reddit has a fresh revenue plank to crow about as it embarks on its eventual roadshow.

The investor pitch

The popular site is impressively growing its user base. The number of global daily active unique users (DAUqs) climbed 27% in the three-month period ended December 31, 2023. For a site that has existed for a decade, that’s a significant achievement.  Specifically, according to the filing, Reddit had more than 500 million visitors in December 2023 alone and, an average of 73.1 million daily active uniques globally in the three months ended December 31. 

Looking ahead, Reddit believes it still has plenty of opportunity to grow revenue through advertising. Unsurprisingly, it claims to be in the “early stages” of using machine learning and prediction models to “better match supply and demand and deliver return on investment” for its advertisers. Examples of that include using prediction models to do things like help better predict conversion rates of an ad.

Advertising revenues in the technology world have recovered to a degree, with companies like Meta and Amazon that sport massive ad incomes reporting earnings that included growth in that area of their larger business. After some time in the doldrums, the tides of the economy could be tilting back in Reddit’s favor.

Reddit wants to parlay its user growth into advertiser revenue growth. It ambitiously estimates that its total addressable market globally from advertising alone, not including China and Russia, to be a whopping $1.4 trillion. It’s talking specifically about desktop and mobile web, display, video and social direct response ads, in addition to search advertising.

Reddit is not an enterprise SaaS business, so it has a different business model than much of startup-land. But if it does manage to price its IPO well, and put up some strong early trading results, it could help nudge some other late-stage, private-market tech companies off the sidelines and into the IPO chute. Not only would that make your friendly local venture capital reporters happy, as we love the data that IPO filings bring to us as much as we love oxygen, a surge in public-market liquidity would also be a boon to venture investors long sitting on paper returns that they would love to convert to cash.