Reddit share sale values platform at $6.4bn

By Alagbe Shenayon On Mar 21, 2024

Reddit has set the price of its shares at the upper end of the marketed range, resulting in a valuation of the social media platform at $6.4 billion (£5 billion).

Having raised $748 million by selling 22 million shares at $34 each, Reddit’s initial public offering (IPO) stands as one of the largest among social media firms. Trading of the shares is set to commence on the New York Stock Exchange on Thursday.

In a departure from the norm, the company made some of the shares available to its users, although the exact number of takers has not been disclosed.

Founded nearly two decades ago, Reddit has emerged as one of the world’s most popular websites, serving as an online forum for users to engage in discussions on various topics. As of December 2023, the platform boasted over 73 million users, according to company data.

However, Reddit’s IPO filing raises a longstanding question: how can a platform primarily centered on user-generated content generate revenue? Unlike some platforms, Reddit does not charge users for access; browsing, posting, and commenting are all free.

For years, Reddit struggled to turn a profit, leading some to question its multi-billion-dollar valuation. Despite this, the company has experimented with various revenue streams, including a significant visual overhaul in 2017 aimed at attracting advertisers.

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However, it appears that Reddit’s journey towards profitability has a clear path, centered around AI technologies.

This is because companies like OpenAI, the developer of ChatGPT, are willing to pay for access to the data from these spontaneous conversations.

Google is reported to have paid Reddit $60 million for the privilege of analyzing nearly two decades’ worth of discussions to enhance its AI capabilities. Additionally, Reddit has disclosed that it has entered into licensing agreements worth more than $200 million over the next two to three years.

Given that Reddit reported a loss of $90.8 million in 2023, revenue from AI firms could potentially push the platform into profitability.

Inquiries and accusations

But there are also plenty of concerns on Reddit’s horizon too.

On one front, the social media platform is encountering heightened regulatory scrutiny.

The US Federal Trade Commission (FTC) is currently investigating Reddit’s data licensing practices for AI models. Generally, regulators are averse to the practice of large technology companies monetizing data generated by users.

While Reddit may have anticipated such scrutiny, it may have been caught off guard by a legal challenge from mobile phone company Nokia, which alleges patent infringement by the platform.

“We will evaluate their claims,” Reddit said, adding that it’s faced similar accusations in the past.

Perhaps most significant of all is that Reddit’s filing with the US financial markets regulator, the Securities and Exchange Commission (SEC), notes its users as a potential risk that comes with owning shares in the company.

“If we fail to increase or retain our user base or if user engagement declines, our business… and prospects will be harmed,” it said in the filing.

“If Redditors do not continue to contribute content or their contributions are not valuable or appealing to other Redditors, we may experience a decline in the number of Redditors accessing our products and services… which could result in the loss of advertisers.”

Reddit’s user community has frequently responded with frustration to platform changes.

Recent alterations have provoked significant displeasure among users, as evidenced by a search for chief executive Steve Huffman – known by the username u/spez – revealing that mentions of him often include profanity-laden comments.

Despite the growing discontent and occasional threats of abandonment, such as the blackout that disrupted Reddit’s functionality in 2023, these reactions have typically been short-lived.

Despite attempts to establish alternative platforms, Reddit enjoys a notable advantage: the absence of a significant rival.

While user concerns persist, Reddit’s reliance on its user base appears to provide a measure of stability in the stock market, particularly considering the lack of viable alternatives for users.