Reddit’s Delayed IPO May Mean CEO Steve Huffman Needs to Rethink Its Advertising Model

When Reddit goes public, it must show investors it can continue to make money. In this advertising economy, that's easier said than done.

In this photo illustration, a Reddit logo is displayed on a smartphone.
Reddit filed with the U.S. Securities and Exchange Commission to go public in Dec. 2021. SOPA Images/LightRocket via Gett

Reddit’s signal that it was exploring going public made it one of the most anticipated initial public offerings (IPO) in 2022. The IPO process typically takes six to nine months, but 13 months after it announced its filing, Reddit still isn’t on the stock market.

It doesn’t make sense for a tech company to go public right now, given the declines in the stock market in the last year, said Kyle Stanford, an analyst at Pitchbook. But there are other, structural reasons that may be holding the company back.

Reddit is a news aggregation and discussion site popular among Gen Z and millennials. The majority of Reddit’s revenue comes from advertising, according to Business of Apps, a publisher covering the app industry. Reddit also sells a $5.99 per month ad-free premium subscription, which an estimated 344,000 users paid for in 2021, the most recent year the data was compiled.

When Reddit does go public, it needs to show investors it can continue to make money, said Jamie Cohen, who teaches media and advertising courses at Queens College. The lagging IPO suggests the social media site has issues with its advertising model, he said. Advertisers are pulling back their spending due to economic conditions, and companies across the tech and media industries are cutting costs and laying off staff to protect their bottom lines.

Reddit earns significantly less than its competitors despite having the same advertising model as platforms like Facebook, Instagram and Snapchat. Reddit’s estimated 430 million monthly active users, called Redditors, don’t mind seeing ads on the platform because they aren’t intrusive like ads on other sites, Cohen said. But that could change if the ads become more frequent or take up more space, which might be necessary for Reddit to prove to investors it can grow. “How do you make more ads or ad revenue appear without upsetting the user base?” Cohen asked.

Reddit users are loyal to the platform, so showing more ads wouldn’t necessarily drive Redditors away, he said. But it could lead to users speaking poorly of Reddit on other social media, making it more difficult for the platform to attract new users.

The site could expand its use of ads that appear from search results, which advertisers pay more for. For example, a diner in New Jersey could buy ads that emerge when a user searches “restaurants in New Jersey.” These are “sly ads” that aren’t intrusive, Cohen said. Reddit didn’t respond to the Observer’s interview requests.

Reddit’s value is changing with the market

Reddit filed to go public in Dec. 2021 and reportedly sought a valuation of more than $15 billion, which is $5 billion higher than its most recent estimate.

In 2019, investors valued the site at $3 billion. That doubled to $6 billion in February 2021 and $10 billion by that August, its most recent round, thanks to big investments during the pandemic. But it would be surprising to see Reddit receive a valuation this high based on what’s happening in the stock market now, said Bernie McTernan, a Needham & Company analyst.

Venture capital-backed companies were valued in 2021 at 16 times their annual revenue, which indicates high growth potential, said Stanford, the PitchBook analyst. That has since snapped back to valuations of three times revenue, he said. “If they had gone public in 2021, they could have gotten a very high multiple,” he said. “Now they definitely can’t.”

Reddit’s case isn’t unusual, but it is happening to every tech company trying to go public in this economy. No one wants to be the first, and Wall Street likely won’t see any new tech stocks in the first six months of 2023, he said.

Reddit’s revenue is a fraction of that of other social media sites. In 2021, the most recent data available, Reddit earned $350 million according to Business of Apps. By comparison, Snap made $4.12 billion and Pinterest earned $2.58 billion.

Reddit’s Delayed IPO May Mean CEO Steve Huffman Needs to Rethink Its Advertising Model