Reddit’s March IPO could buoy its ads business – but ‘it’s a tightrope walk,’ experts say

The site, designed to host community discussions in anonymous threads, has not turned a profit in its nearly 20-year history, according to a June 2023 post from the company’s cofounder Steve Huffman.

Reddit's revenue is generated primarily through advertising, though the platform also offers a monthly subscription service with premium features. But it faces intense competition for advertising dollars from bigger players like Meta and TikTok, and has in the past attributed losses to relatively low advertising engagement rates.

Nonetheless, the decision to go public has been a long time coming for Reddit. The organization filed a confidential registration statement with the US Securities Exchange Commission (SEC) in late 2021, indicating its plans to go public.

After a $410m capital infusion from a funding round headed by Fidelity and talks with Morgan Stanley and Goldman Sachs that put the platform’s potential valuation as high as $25bn, things were looking good. But volatile market conditions of the past couple of years put many IPOs – including Reddit’s – on ice.

Unlocking greater advertising potential

Today, the social platform is looking stronger. A December report from The Information confirmed that the company expected to pull in just over $800m in advertising revenue in 2023, up 20% from the year prior.

The company has invested more in its advertising products in an effort to aid this growth. It recently upgraded its Ads Manager platform and its Ads Formula learning hub, and it's rolled out its new Boost 2.0 Certification Program, an educational module for advertisers looking to optimize their campaigns on the site.

“These initiatives signal Reddit's determination to refine its ad products and educate advertisers, aiming to make the platform more attractive and user-friendly for ad campaigns,” says Jeremy Goldman, senior director of marketing, commerce and tech briefings at Insider Intelligence.

Goldman believes that a public offering would boost Reddit’s advertising business and fortify its bottom line. “Reddit's decision to go public could potentially provide a much-needed financial injection and elevate its profile in the competitive ad market,” he says. “The influx of capital from the IPO could be allocated towards enhancing the platform's advertising capabilities and user experience.”

Advertising industry leaders tend to agree. “What always follows a social platform IPO is pressure to increase ad revenue, which generally means an investment into more ad products, more sophisticated tactics and more premium sponsored real estate. I predict all of that will happen with Reddit and they will begin to focus on bringing their ad product up to speed,” says Michael Goldstein, head of communications strategy at Omnicom-owned ad agency DDB North America.

And as Simon John, vice-president and head of social media EMEA at media agency Media.Monks says, “Reddit’s IPO will bring a much needed infusion of capital that can help with the platform’s growth and enhanced features. Moreover, it allows Reddit to develop features and functions, being able to attract a larger – and less niche – user base, which is in turn favourable for advertisers.”

Improvements to Reddit’s video ad products and audience tracking would be obvious early investments post-IPO, Goldstein predicts.

And enhancing the platform’s ad products could benefit the advertising ecosystem at large, he suggests, offering new opportunities to brands in what he sees as an “increasingly homogenous” social media landscape.

Reddit also houses a gold mine of first-party user data that, if packaged appropriately, Goldstein says, could greatly benefit the business – especially as advertisers scramble to find new privacy-safe modes of targeting and measurement amid the depracation of third-party cookies.

A balancing act

Despite the promise, there are surefire challenges ahead.

For one, Reddit’s audiences are unique in many ways in the social media landscape. As Insider Intelligence’s Goldman puts it: “Reddit's unique community-driven model, which starkly contrasts with platforms like TikTok and Meta, means it has to continuously balance monetization efforts with maintaining the authenticity and user satisfaction that define its niche.”

In essence, Reddit users tend to be invested in the authenticity of the platform’s communities and easily put off by commercial incentives, which they generally see as threats to that authenticity.

In September, for example, Reddit’s decision to bar users from opting out of personalized ads on the site incited harsh backlash. Earlier last year, users protested against proposed changes to Reddit’s API pricing. “Tensions between the platform's business ambitions and its user-base's expectations,” Goldman says, “could potentially affect advertiser perception and user engagement, which are crucial for the platform’s ad revenue.”

It's a sentiment echoed by other experts. Media.Monks’ John says: “The IPO will put increased focus on ad revenues, profit equals stock price and the platform will be under the microscope of the financial markets from quarter to quarter. Reddit as a platform is very much about its stakeholders – its strong community – and not shareholders. An IPO has the potential to create tension between these two groups as there will be a need to focus on revenue creation, but at what cost to the loyal users?”

At the end of the day, the culture of Reddit's many communities is often averse to brand messaging of any kind on the platform. “The power users of Reddit may consume some ads, but I don’t believe the advertising business is the strongest given the intent of the users on the platform,” says Amit Kukreja, a media entrepreneur and a popular YouTuber who makes content on tech and financial markets. “Even trying to promote your product organically in certain subreddits immediately gets you banned due to the culture of non-promotion.”

At the end of the day, Kukreja is skeptical that an IPO will have a meaningful impact on Reddit’s advertising business.

Goldman, who is less dubious, nonetheless acknowledges that Reddit has its work cut out for it should it want to achieve a more profitable ad business. “As Reddit strides towards its IPO and aims to revitalize its ads business, it's walking a tightrope,” he says. “Success will hinge on its ability to effectively leverage the capital and heightened visibility from going public to innovate and enhance its ad offerings – while also preserving the unique user community dynamics that set it apart.”

Positive potential ahead

In spite of the obvious hurdles, industry leaders suggest that if Reddit is able to improve its advertising offerings and effectively balance competing business and user demands, it will see success on the tails of its IPO.

”As an advertising platform, Reddit is seriously undervalued. Its audience is not only extremely loyal, but its product is also difficult to replicate,” says Chris Harihar, executive vice-president at Crenshaw Communications, a Mod Op company. In particular, Harihar points to Reddit's improved Google search rankings, its strong brand safety tools and ability to effectively reach both B2C and B2B audiences.

To make the most of the opportunity at hand, Harihar says, Reddit needs to do a better job at educating advertisers on the value of its inventory and campaign performance tools.

Goldman puts it simply: “The path ahead for Reddit is promising, but requires navigating these challenges with strategic finesse.”

Reddit declined The Drum’s request for comment.

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