Equity Shot: All about the Reddit IPO!

Hello, and welcome to Equity, a podcast about the business of startups, where we unpack the numbers and nuance behind the headlines. Weekend team, we have something both short and sweet for you: A dig into the Reddit IPO filing that came out just after we recorded our final, regular episode of the week. Since we could not wait until Monday to talk about the numbers, we have an overview here for your delectation. If you want to read along: Reddit IPO filing, first look, written by Mary Ann and Alex Inside Reddit’s AI revenues, written by Kyle Wiggers The Reddit S-1 filing, via the SEC The Reddit IPO could be this year’s public-offering starting gun, or it could be a wet blanket on the year’s liquidity cycle. We’ll see how it prices, and even more how it trades when it does list. For now, we’re counting down until we get an S-1/A! For episode transcripts and more, head to Equity’s Simplecast website. Equity drops at 7 a.m. PT every Monday, Wednesday and Friday, so subscribe to us on Apple Podcasts, Overcast, Spotify and all the casts. TechCrunch also has a great show on crypto, a show that interviews founders and more! Credits: Equity is produced by Theresa Loconsolo with editing by Kell. Bryce Durbin is our Illustrator. We'd also like to thank the audience development team and Henry Pickavet, who manages TechCrunch audio products. Learn more about your ad choices. Visit megaphone.fm/adchoices

• 0:10Speaker 00

  Hello and welcome back to Equity. This is an Equity shot, bringing you breaking news that wasn't out in time for our Friday show. And we would have had Mary Ann on this episode because she is currently sick. We love her, but I did get to write with her about the Reddit IPO, which we have linked in the show notes, and I think is probably still on top of techrunch.com. So go check that out. But yes, Reddit is going public at long last. And you know, we couldn't wait all the way till Monday to talk about the numbers, talk about what we've learned. We've been waiting for this, guys, for so long. Finally here. And I'm so excited about it. If you are a regular Equity listener, you might recall that we did discuss Reddit's deal with Google on the Friday show. And back on February 9, we talked about the ad market.

• 0:55Speaker 00

  So we have been digging in on this for some time. But now we got the S1 filing, which means we have so much information that's new, interesting, and important. So here is an overview for you this lovely weekend. We'll have more, of course, as this company tells us more, and we learn more about other IPOs. But for now, here's what you need to know. Online forum giant Reddit is going public. It's looking at the New York Stock Exchange. It's targeting the ticker symbol RDDT. Not super catchy, but pretty much on the nose. So we can put that aside. Now, the company has filed its first S1 filing. That means we do not have any information yet as to what price range the company may target when it does list its shares publicly. So we do know

• 1:38Speaker 00

  that back in the day Reddit was valued at about $10 billion. But that was a 2021 era price that I don't think many people think the company will reach in its IPO. We've heard prices more around the $5 billion mark. And I've done some math that kind of makes that make sense. But we'll have to see what the market itself says when we get S1A filings after the company does its roadshow. So valuations to come. Today, we're going to talk about its operating results and what that tells us. Key details that you need to know. Reddit grew Twenty one percent in two thousand twenty three, expanding its total revenue from about six hundred and sixty seven million in two thousand twenty two to eight hundred and

• 2:19Speaker 00

  four million dollars last year. That's a lot, just full stop. Reddit's getting close to the billion dollar revenue mark, which I think is kind of testament to being a real unicorn versus more of the startup-y unicorn billion dollar valuation. Also, the company's revenue is great. It has insanely good gross margins, which came to, I think, eighty six percent in two thousand twenty three, up about two hundred basis points from two thousand twenty two. And what this means in effect is, as Reddit brings in more revenue, it gets to use nearly all of that money against its operating expenses. It's just fantastic. And in a non-financial sense, Reddit is also doing pretty well on its user count growth. The company has a metric called

• 3:01Speaker 00

  WAUQ, AKA W A U Q, weekly active users effectively, and that number scaled from two hundred and eighteen million in the second quarter of last year up to two hundred and sixty seven point five million in the fourth quarter of two thousand twenty three. And that's the highest number we have data for. So Reddit is coming into its IPO cycle with pretty strong user momentum. That's great because more users, more activity, more activity, more revenue. People want to see a growth story, and there's one. But despite the strong growth, despite the strong margins, and despite the fact that Reddit's usage is going up, the company is still losing money and burning cash. The company had a net loss of about ninety one million dollars last year,

• 3:45Speaker 00

  and negative free cash flow in two thousand twenty three of about eighty five million dollars. Those are not terrible numbers for a tech company going public, in terms of percentage of revenue terms. I mean, I mean, no one wants to lose ninety one million dollars, but the company is still unprofitable, and it's unprofitable at a point in time in which investors on the public markets are putting more value on cash generation and also just general profitability. Now, in response to that, I will say that in the fourth quarter of last year, Reddit did post positive net income. That's very important. And it reached about $250 million in revenue. Of course, any ad-based company is going to have a better Q4 than any other quarter because people advertise more around the holiday season.

• 4:30Speaker 00

  But still, a quarter billion dollar quarter and positive net income are big things that Reddit has in its back pocket as it goes out to investors on the roadshow and says, hey, you should invest in us. There's also other tailwinds to note. Reddit did sign that deal with Google we mentioned on the other show, but we got more information from the company on the details of its data deals. And the numbers look pretty enticing. So this year alone, Reddit expects to recognize at least $66.4 million in data deals with AI companies and models. That's about what, 7%, 8% of its revenue last year? So that's some growth that's baked into its business, even if its core operations are flat this year, which I don't think they will be,

• 5:13Speaker 00

  but it does mean it has growth already kind of locked in. Even more, the total value of the AI deals it has signed for its data are worth $203 million over the next couple of years. And the company thinks those numbers are going to go up. So if you believe in the AI growth story, Reddit could be a pretty attractive buy. On the other hand, the company did consume cash in the fourth quarter of last year, and that's not great. It was profitable, sure, but still burning cash at this level of maturity, age and scale isn't the world's best thing to tell investors. That said, I do think the company has more positives than negatives to kind of take on its roadshow. But I just bring that up to point out that no company is perfect when it goes public.

• 5:57Speaker 00

  And Reddit's unprofitability will probably be the chief sticking point in its operations. It also has to tell investors that its core business, which is essentially ads against its social activity on its website, do have legs to grow. The ad market, as we've talked about on this show, had a somewhat rough 2023, but did get better as the year ended. And you can see that in the results of Meta, Amazon and other companies that do quite a lot of ad-based business. But Reddit is a smaller site and we have seen companies that are not amongst the absolute top tier of the tech world suffer a little bit in advertising growth. Think about Snap and maybe X, for example, in that bucket. Still, with 21% growth last year, Reddit's doing at least fine. I'm just curious to see how much its core business can expand this year.

• 6:41Speaker 00

  And I presume investors will also want to know. Okay, so that's Reddit in a nutshell. Of course, there's a lot more in the S1 filing. As always, I really recommend that you at least skim it. This is the sort of thing I think teaches us a lot about how businesses work, how they see the world, who owns their shares and more. But let's talk about context a little bit. Reddit is going public. It's a big deal for its backers, its shareholders, its employees, its fans, and possibly even some Reddit users who may get IPO allocation. But the Reddit IPO matters for a lot of other companies as well. There are so many unicorns and late-stage startups that need to go public or find an exit through another avenue. And if Reddit prices well and trades well,

• 7:23Speaker 00

  it could better open that door and allow more companies to go public quickly and also more aggressively. On the other hand, if Reddit struggles out the gate and doesn't do well, doesn't price well, has a bad first day's trading, it could really throw the proverbial wet blanket over the IPO market and leave a lot of companies stuck between needing to go public and being too afraid to. So Reddit won't be the chief and most important bellwether of all time for the IPO market, but it is a big, well-known tech company that is going to go public, and so it will matter regardless. If it was an enterprise SaaS company, it'd probably have more weight in the decisions of other unicorns. But Reddit is still just so well-known and so venture-backed that, yeah, this one really does matter.

• 8:08Speaker 00

  We will be covering this IPO in detail over the coming weeks. We expect an S1A filing in a couple of weeks after the roadshow gets through its motions. And so stick with Equity as we figure out what's happening here and also what will happen next. Equity comes out three times a week, Mondays, Wednesdays, and Fridays, and sometimes even on the weekends when things happen that we just can't not talk about. My name is Alex. The whole crew is back next week. I'll talk to you on Monday. Bye.

• 8:35Speaker 00

  Equity is hosted by myself, Alex Wilhelm, and TechCrunch Senior Reporter, Mary Ann Azevedo. We are produced by Teresa Locan Solo with editing by Kel. Bryce Durbin is our illustrator. And a big thank you to the audience development team and Henry Pickavet, who manages TechCrunch Audio Products. Thank you so much for listening, and we'll talk to you next time.