Reddit: profits, not protests, will determine IPO success

Steve Huffman took charge of Reddit in 2015 as the returning hero, successfully smoothing over a user revolt that threatened the company he co-founded. Protests this year suggest goodwill is wearing thin.

More than 7,000 forums on the online message board, known as subreddits, have closed access to the public, making large parts of the Reddit site invisible. Moderators are unhappy about the company’s plan to charge developers for access to its application programming interface (API). This gives third-party apps access to Reddit data.

The change is described as a way to charge companies that use Reddit data to train artificial intelligence services. This is reasonable, if a little late. But it is also linked to the plan to become a profitable, public digital advertising company. Reddit is lossmaking. Most of its revenue comes from advertising. Allowing developers to create ad-free interfaces for free makes little commercial sense. Twitter has made a similar move.

Similar to other social media companies, Reddit relies on users who post and moderate content for free. The shutdown shows what little recourse they have when protesting change. Reddit thinks the protest will pass. It is probably right. User scuffles are unlikely to hit the company’s valuation ahead of a planned initial public offering.

But there are other reasons to think Reddit will not enter markets with the $10bn valuation it earned in its last fundraising round in August 2021. These include a quiet IPO market, a digital ads market downturn and tech stock sell-off. At $10bn, each of Reddit’s 57mn daily users would be valued at $175. Compare that to Meta, a company expected to report $30bn of net income this year, where users are valued only a little higher at $230 each. Assume Reddit’s valuation suffers the same 25 per cent decline as Meta’s stock price since August 2021, users would be valued at about $130. Regardless of their protests, Reddit users deserve to be marked down by markets.