After last month’s IPO pop, Reddit stock has fallen considerably from ~$75 to $46. As a heavy Reddit user, I’ve been wrestling with one question – why? Share your thoughts below – in the meantime, here’s my two cents:
The key questions for Reddit will be can they increase their monetization per user and is their niche community content “special” enough to advertisers to make up from each community’s comparatively limited scale.
~Is Reddit growing?~
Unlike many mature social platforms, Reddit has shown recent acceleration in growth across both their core U.S. market as well as globally. In Q4 2023, Daily Active User growth was 27% year over year, up from 7% in Q4 2022 – In fact, the U.S. displayed even stronger comparative DAU growth at 34% vs 6%. Accelerating growth is impressive for a platform of this scale, but what is driving it? If you ask Reddit, they’d say growth is being driven by gaming-related communities and global affairs – will that persist? Compared to other social and ad driven platforms, Reddit has plenty of user growth to accomplish to compete on scale and win large advertising budgets.
~Is Reddit’s content “special”?~
Reading through the Reddit S-1, management certainly thinks that Reddit’s content is differentiated. User intent is a key determining factor for advertising value and Reddit should hypothetically have plenty of high intent customers – For example, Purina Dog Food should in theory pay a higher price to advertise on r/Dogs given the higher likelihood for purchase within the community. That said, there are at least two major open questions: 1) What do you do with all the toxic or less appealing content currently on the Reddit platform? and 2) Will the communities be simply too niche (i.e. small) for top brands to drive large enough conversion to make Reddit an important channel?
~Will Reddit improve its monetization?~
Reddit’s monetization doesn’t seem to be improving – and if it is, it’s inconsistent and minimal. Reddit collects revenue primarily from advertising across and their average revenue per user declined last year. In the fourth quarter of 2023, Reddit’s U.S. ARPU fell 7.4% to $5.51. When compared to its social platform competitors, Reddit is significantly under-monetized. In 2023 Meta’s ARPU rose 2.4% to $40.60 and Meta’s has a larger portion of users in less monetizable regions and emerging markets. Why is Reddit’s ARPU growth already stalling out?
~So, what does this mean for Reddit?~
Niche community segments x lower monetization doesn’t equal a winning strategy. Reddit with need to demonstrate an ability to increase both the pricing on its ad inventory as well as it’s users to be a public market darling.
Comment below with your thoughts and any useful articles! Do you think tech IPOs are back?
#reddit #ipo #investing #DAU #growth #tech #venturecapital Ansa Capital
