Introduction:
After social media platforms such as Facebook (2012), Twitter (2013), Snap (2017), and Pinterest (2019) went public early, Reddit, which has been established for nearly 20 years, finally successfully went public this year.
As an established social media, news website, and content aggregation platform, Reddit's form is actually very similar to Tieba 20 years ago, with everything from popular news to various niche topics. While other social media platforms focus on binding users with social relationships, Reddit has chosen a more difficult path - creating a unique sense of belonging based on interest communities that other platforms find difficult to replicate.
The interesting thing is that, nearly 20 years after its establishment, Reddit seems to have truly ushered in its golden age. Google Trends data shows that compared with other fluctuating trends in search volume, Reddit's search volume continues to rise, which can be considered as a breakthrough.
In the US stock market, Reddit, which has been sharpened for ten years, also submitted an extremely excellent answer sheet in its first year of listing - the stock price rose by more than 300% within the year, far exceeding the performance of Facebook, Twitter and other companies in their first year of listing.
So, how did Reddit achieve all of this? What is its true competitiveness and unique value compared to competing products? In the current AI boom, what surprises can Reddit, which has a data gold mine, bring? In this article, the RockFlow research team will review Reddit's development history and business progress, and analyze its recent stock price catalysts and investment value in depth.
1. How did Reddit get to where it is today？
Reddit was founded by Steve Huffman and Alexis Ohanian (husband of tennis superstar Serena Williams) in 2005. Y Combinator initially funded the startup. In addition, it has raised multiple funds from A16Z, Tencent, well-known rapper Snoop Dogg, and others.
YC founder Paul Graham called it "the front page of the internet". Anonymous users can discuss any topic here, and Reddit's unique features mainly include:
- Subreddits : Users join sub-communities they are interested in - Subreddits, which are not officially responsible, but managed by volunteers
- Voting mechanism : users can vote for or against posts and comments, making the most popular or helpful content displayed to everyone
- Karma : Reddit rewards Karma points every time a user's content receives a support ticket, helping to unlock more posting rights and other benefits
The reason why it is called "front page" is because Reddit has a huge influence on public opinion, just to give two examples:
First, it popularized the AMA (Ask Me Anything) event, and even the most well-known public figures such as Obama and Bill Gates have come here to hold AMA events.
Secondly, Reddit sub-forums have amazing energy. In 2021, the US retail investor stronghold r/WallStreetBets called for a bearish squeeze on stocks such as GameStop, resulting in significant losses for several hedge funds. The slogan "Blast Wall Street" highlights the cohesion and influence of this community.
Compared to other social platforms (Facebook, Instagram, Twitter, etc.), Reddit has two characteristics:
- Anonymous: Real name, age, gender, and profile picture are not required here. Users can speak freely without pressure, and focus more on content quality rather than the identity behind the post (but it should also be acknowledged that the problem with anonymity is the complexity and difficulty in content moderation and community management).
- Transparency: Each post and comment has a clear and visible "agree/disagree" button, as well as a counter that tracks the number of votes for the post. Most social platforms only track the number of likes, masking negative reactions, but Reddit tracks the true online sentiment of the post.
Former Reddit CEO Huang Yishan once said, "You can understand people through what they say and their contributions to the community, not their names, positions, or identities. What's more important is what people choose to contribute content or ideas, rather than emphasizing pre-existing relationships."
Like other social media platforms, Reddit's main source of revenue is advertising. In addition, it has also explored methods such as user paid subscriptions and API licensing fees.
Advertising accounts for the largest part of Reddit's revenue, but it wasn't until 2020, 15 years after the company was founded, that it launched an automated ad platform. Reddit sells ads in two main ways: providing hosting services to large advertisers. Advertisers using Reddit ads can use a dedicated Reddit sales team, a full set of tools, and a platform; an auction-based system. Advertisers use the CPC model to bid, and the company with the highest bid wins a better display position.
Compared to other social platforms, Reddit ads are relatively cheap. This is mainly due to Reddit's lack of user information and low positioning quality, while platforms such as Instagram and Facebook collect more refined user data. Its ad platform is relatively new and the ecosystem is not yet saturated, so its competitiveness is weak.
Paid subscriptions were a direction that Reddit was once very optimistic about. Users can get VIP treatment by paying, such as ad-free experience, personalized avatars, exclusive access to sub-communities, and virtual assets. In addition, Reddit users can purchase and give away virtual goods, which is similar to the gameplay of many social media platforms today.
As for API fees, starting from July 2023, Reddit began charging developers for accessing its API. The fee is $12,000 per 50 million API requests, which is slightly higher than many companies in the field, but lower than X's fee of $42,000 per 50 million requests.
2. The true competitiveness and unique value of Reddit
Reddit once hoped to replicate the Facebook model, encouraging users to actively use the platform (preferably every day) and displaying ads in posts and videos. However, the reason why Facebook ads are effective is that they are highly targeted at advertisers' value proposition. The platform has sufficient knowledge of users' personal information, and users' social graphs are also easy to mine.
However, Reddit does not have this advantage. Given that most users are anonymous and have no social connections, it knows very little about users and cannot sell ads at the right price.
Taking a February 2021 analysis as an example, in terms of user scale, Reddit belongs to the same level as other social media giants, with MAU almost the same as Pinterest, even surpassing Twitter at that time.
However, Reddit's weakness at the time was that the implicit value of a single user was very low. Compared to Facebook's single MAU contribution value, it was 19 times worse.
However, this does not mean that Reddit cannot compete with others. As mentioned earlier, Reddit's unique value lies in its strong community, where users can have real-time conversations with others who share interests and opinions on various Subreddits. Although it has existed for nearly 20 years, the sense of belonging of its nearly one million active sub-communities still appeals to many users.
Reddit is both a search engine and a self-service professional forum. If you want to learn about other people's opinions on something, every movie review, political debate, complaint against the company, and life sharing on Reddit can be used as a reference. It will make you understand that you are not alone.
In addition, there are currently voices suggesting that the foundation of Google search may be loosening. People do not trust the results provided by search engines because their goals are no longer aligned with those of the searcher (if ever). Users turn to Reddit because it is easier to trust. Users who originally wanted to find valuable content on Google are now using Reddit as an important alternative.
Why do users choose Reddit? The answer is that most online content has become unreal. Users do not want to be disturbed by blog promotions that have mastered SEO skills, and prefer to hear real feedback and suggestions.
From a business theory perspective, Reddit's value support for customers (advertisers, not users) is user trust, not its ability to target users. For a long time, the search ads market has been dominated by giant Google, but as more and more users know and search on Reddit, Reddit is expected to monopolize a "recommendation" space that even Facebook and Amazon do not have.
The RockFlow research team believes that Reddit can gain more revenue by competing with Google in the search field.
3. Three catalysts for Reddit's stock price, which rose 300% this year
RockFlow's investment research team believes that Reddit's stock price surge this year is due to the market seeing a significant increase in its user base, continuous growth in customer engagement's contribution to revenue, and the ability to explore new sources of revenue. Specifically, it cannot be separated from the following three catalysts.
Catalyst #1: AI capabilities + Google traffic help users grow rapidly
In 2022, Reddit is still striving to expand its user base. The year-on-year growth rate of Daily Active Users was only single digits that year, and by the second quarter of 2023, this number was only 7%. However, since then, growth has begun to accelerate, and as of Q2 2024, its DAU has surged by more than 50% year-on-year. At the same time, Reddit has more than 365 million global users. Two years ago, this number was less than 209 million.
The rapid growth of Reddit's user base is inseparable from the contribution of AI. Previously, most of its users and ads were provided in English, mainly targeting US users. However, it has been using AI to enhance its Machine Learning capabilities and translate website content into other languages, greatly helping its development outside the US.
In a letter to shareowners in Q3 2024, CEO Steve Huffman identified the new AI translation feature as the main driver of the company's latest performance growth. "The most significant growth in 2024 will be in France, India, and the Philippines. Reddit's goal is to become a more global platform, and one of the reasons for its growth is its increased focus on Machine Translation and Content Localization."
The management also stated, 'As Reddit content is translated and indexed by search engines, we see accelerated growth in top channel traffic and login users. As of the end of the third quarter of 2024, Machine Translation content has been fully launched in France and Spain. We have also started providing translation services in Germany, Brazil, and Italy, and will expand our service scope to more than 30 other countries in the fourth quarter and 2025.'
This effort has just begun, but the market has already seen the huge long-term potential of Reddit in DAUq.
In the long run, Reddit is expected to continue to grow into a global text-based social giant, not just limited to US users, but covering real-time content and interactions from users around the world.
In addition to continuing to improve AI tools, the Reddit CEO also talked about another important factor that keeps the company vibrant: "As of 2024, 'Reddit' is the sixth most searched word on Google in the US, which means that when people are looking for answers, advice, or community, Reddit is one of the important destinations."
The word "Google" appeared 22 times in Reddit's latest earnings call, and Reddit is continuously strengthening its partnership with Google. In the past few months, Reddit's ranking in Google search results has risen rapidly. Google intends to bring traffic to Reddit because they reached an agreement at the beginning of the year to use Reddit's data to train their AI models. The partnership was announced in February, and the chart below shows that its unlogged-in users are even growing faster than logged-in users.
Catalyst #2: Advertiser diversification boosts traffic monetization capabilities
As mentioned above, historically, Reddit's advertising monetization ability has been poor. The following chart compares Reddit's traffic monetization efficiency with competitors such as Meta and Pinterest.
All along, this low monetization efficiency has been due to the Reddit platform's inability to bring high return on investment to advertisers. Therefore, improving advertising return on investment and attracting more advertisers to join has been a key goal since its listing. In the third quarter, Reddit announced that many new well-known customers have started using Reddit Pro (the company's market intelligence and ad platform for enterprises), including key customers such as the NFL (US Professional Football League) and MLB (US Professional Baseball League).
In addition, the team's new platform is continuously increasing the usage rate of advertisers in different regions, sizes, and vertical categories.
Of course, the increase in advertising volume is also one of the main driving forces for Reddit's revenue growth. During the third quarter conference call, the management disclosed more plans and innovative directions, such as focusing more on improving the search function so that users can find the information they need faster. The company believes that this can provide more opportunities for advertisers to target users more effectively.
The year-on-year growth in advertising revenue is mainly due to the increase in the number of impressions brought by user growth, more efficient advertising load, and the expansion of conversational display advertising, while pricing remains consistent with before. We hope to provide advertisers with an omni-channel solution, and we can do more in modeling, measurement, and automation to provide more value to advertisers. Moreover, all of these can be expanded as users grow.
The combination of diversified advertisers, the use of Reddit Pro, and more efficient ad loads resulted in a 56% year-on-year increase in advertising revenue in Q3 2024. This is the key progress expected by the market and the core factor driving Reddit's continued growth in the future.
The RockFlow research team believes that this year is only the first year that Reddit has narrowed the gap with its competitors, and it will continue to improve to a level close to other social giants in the future.
Catalyst #3: Data gold mine brings new revenue
According to the Q3 2024 financial report, Reddit's net profit in a single quarter reached $29.90 million, far exceeding the loss of $7.40 million in the same period last year. Due to better-than-expected performance, Reddit's stock price soared 40% the next day.
The increase in Net Profit is obviously inseparable from the multiple structural reforms implemented by Reddit's management. In addition to continuously improving its traffic monetization capabilities, the company is also seeking multiple new sources of revenue, including reaching content licensing agreements with Google and OpenAI (allowing these two tech giants to train AI models based on user content), as well as other data licensing partnerships.
Given the large amount of high-quality and easily accessible real user text content stored on the Reddit website, it has huge development opportunities in the field of data authorization. For AI training, this is a gold mine. In May of this year, Reddit signed an agreement with OpenAI to allow the latter to access Reddit content to train its AI models. Reddit's stock price surged 15% after the news broke (it is worth mentioning that OpenAI founder Sam Altman also owns tens of millions of Reddit stocks).
During the latest earnings call, Reddit management also disclosed a new partnership with Meltwater. "In the third quarter, we established a new partnership with media and social intelligence company Meltwater. Meltwater accesses Reddit content through our data API, which enables our customers to discover brand insights, monitor industry trends, and participate in discussions on the platform."
The RockFlow research team believes that Reddit, as a treasure trove of data, still has new value to explore, and may hear more Reddit data monetization collaborations in the future.
4. Conclusion
In the investment landscape of social media, Reddit has built a unique data gold mine and user ecosystem with 20 years of deep cultivation. The RockFlow research team believes that with its advantages in the AI era - massive high-quality UGC content, strong community cohesion, and diversified monetization potential, Reddit is quietly becoming an important information entry point after Google, and also a scarce investment target across social, search, and AI ecosystems.
Author Profile:
The RockFlow research team has a long-term focus on high-quality companies in the US stock market, emerging markets such as Latin America and Southeast Asia, and high potential industries such as encryption and biotechnology. The core members of the team come from top technology companies and financial institutions such as Facebook, Baidu, ByteDance, Huawei, Goldman Sachs, CITIC Securities, etc. Most of them graduated from top universities such as Massachusetts Institute of Technology, University of California, Berkeley, Nanyang Technological Institute, Tsinghua University, and Fudan University.
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