What was revealed about Reddit’s advertising business in its IPO application

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

The social network is scheduled to IPO next month under the stock price symbol RDDT. The company was valued at $10 billion at the end of its Series F funding round in 2021, but investors have advised it to consider a $5 billion valuation at the time of its IPO. Since its founding in 2005, it has raised approximately $1.3 billion in 10 funding rounds.

But how does Reddit make money? Ads, ads, and ads.

The company’s S-1 filing with the SEC provides insight into the intricacies of Reddit’s advertising business and its strategy to become a “leader in contextual advertising.”

Let’s dive in.

First of all, advertising

“Advertising is our first business,” Reddit CEO and co-founder Steve Huffman wrote in a letter to investors.

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

The company operates its own advertising platform and its own advertising auctions where advertisers can bid based on cost-per-impression, cost-per-click, or cost-per-video view. In Q4 2023, 88% of Reddit’s ad revenue came from auctions rather than direct transactions.

The best-performing advertising areas in the fourth quarter included technology, finance, and media and entertainment, which together accounted for 52% of ad revenue. During the same period, 50% of advertising revenue came from performance campaigns rather than branding campaigns.

On the direct sales side, 65% of Reddit’s Q4 revenue came from Fortune 500 companies, and 30% of its total Q4 revenue came from mid-market and small businesses.

All-in-one in context

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

Reddit also has its own third-party pixel (called the Reddit pixel) to track user behavior outside of the platform.

But even though Reddit has a ton of first-party behavioral data on its logged-in user base, it’s putting all its eggs in the context basket.

“The basis of our advertising performance is based on context and interest, rather than tracking users based on personally identifiable information,” the filing states. “Not relying on third-party data makes our service more resilient to signal loss and future changes to the internet ecosystem that other platforms rely on.”

profit and loss

Last year, Reddit generated just over $804 million in revenue. This was a 21% year-over-year increase due to a surge in impressions from daily active unique users. In the fourth quarter, Reddit averaged 73.1 million unique daily actives.

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

Profitability has long been an issue for Reddit, but the company was able to contain some of its losses compared to last year. 2021 revenue was $485 million and net loss was $128 million, and 2022 revenue was $667 million and net loss was $159 million.

The filing says Reddit could turn its fortunes around by opening up new revenue streams by licensing first-party data to third parties for advertising purposes or to train large-scale language models for generative AI. .

And Reddit is already well underway with some of its plans. The company announced Thursday a $60 million annual deal to license content for Google’s AI models.

risk assessment

However, Reddit also acknowledged that it is in the early stages of monetization and that there is “no guarantee that we will be able to scale the business for future growth.” The company pointed to past net losses and acknowledged that it “may not be able to achieve or maintain profitability in the future.”

It also highlights some of the vulnerabilities of the advertising business, with revenue dependent on fluctuations in user engagement and search traffic.

International expansion is also a question mark for any ad-based business, given the restrictions that regulations such as Europe’s GDPR place on targeted advertising and the use of consumer data. Reddit is no exception.

The company acknowledged that it may face obstacles in its pursuit of international growth, acknowledging that both domestic and international operations are “subject to increasingly complex and evolving laws.” ing. That’s to say the least.

Needless to say, Reddit attempts to be transparent about its use of data in publishing, which could expose it to legal or ethical liability.

According to the application’s risk assessment, Reddit “[s] Our continued commitment to data privacy, safety, security, and content review will help us identify instances of misuse of user data and other unwanted activity by third parties on our platform. Become. ”

That is the risk a company faces when going public.