Reddit Falls Short of Ad Growth Targets Ahead of Likely 2024 IPO

Another headwind Reddit faces in winning over IPO investors is that it wasn’t profitable through the first nine months of this year, a person familiar with the matter said.

Reddit—best known for its discussion forums on a wide range of subjects both esoteric and mass-market—has long been a laggard in building a moneymaking business. Though founded about 18 years ago, it didn’t start to focus on building an ad business until eight or so years ago. Before that, it was known for hosting offensive content, which turned off advertisers. In recent years it has cracked down on that content, and lately it has taken a number of steps to woo advertisers.

Its revenue remains tiny given how many users it has. The company can boast that it is one of the larger social platforms on the internet, amassing more than 500 million monthly active users, one of the people said. That would make it bigger than Pinterest, which had 482 million global monthly users as of Sept. 30. But Pinterest’s ad revenue in the third quarter alone was $763 million, close to what Reddit expects for all of this year.

Reddit may be able to reach the billion-dollar ad target in 2024. The company is asking advertisers to increase their spending on the platform next year by slightly more than 20% over 2023, said ad executives from two different firms that are currently negotiating 2024 contracts with Reddit. For one ad firm, the increase would be the equivalent of spending less than $10 million more on Reddit next year. Such an increase seemed reasonable, the ad executives said.

One way Reddit executives are aiming to build their ad business is by creating a program whereby sports leagues and media firms can publish videos on Reddit that will carry commercials paid for by big marketers, said a person familiar with the matter. Twitter, now known as X, has used a similar approach to draw in advertisers whose commercials run alongside clips from media companies, sports leagues and individual video creators.

Twitter’s program, Amplify, splits the revenue with media firms providing the clips. Amplify used to generate more than $1 billion annually, before Elon Musk bought the company last year. Revenue from Amplify has taken a severe hit as advertisers fled the platform in the wake of the Musk purchase.

If investors assume Reddit can lift its ad revenue next year to around $1 billion, they'd likely value it at around $7 billion, given where Snap and Pinterest shares are currently trading, although Reddit could get a premium for its higher growth rate. That compares with the $6.6 billion value Fidelity put on the company in 2022 and well below the $10 billion valuation Reddit got in a fundraising in 2021.

Reddit is expecting to finally go public in the spring or early summer, the person familiar with the situation added, with Morgan Stanley leading the deal. Its IPO ambitions may rely on how successfully it can show that its advertising business can not only continue growing but also take a sizable market share from larger incumbents, including Meta Platforms, Snap and Pinterest. The company is also planning to pitch a second leg of its business to investors, one that charges companies for access to the application programming interface Reddit rolled out this year.

Video Ad Push

A big part of Reddit’s plans for a video ad program like Twitter’s will be a new video advertising product enabling Reddit to automatically insert different ads, which will play before or after videos. This is a pretty standard approach for a digital video ad unit, but it’s not something Reddit has been able to offer so far. Right now, those ads often have to be manually stitched into the video file.

This kind of standardization would propel Reddit’s ad business and make it less archaic and more sophisticated, the person familiar with the matter said. For example, it’s a lot easier to get multiple advertisers to compete and bid on running ads against a video published to Reddit by a top creator or sports league than it is for those advertisers to individually work out deals directly with the creator or league.

Reddit has not yet shared much about its ad product road map with ad executives, but they noted that the company has been focused on educating marketers about the platform and its audience.

Jodi Anderson Jr., who formerly worked on ad sales at Reddit, said its main pitch to advertisers was that its users were more “leaned in” because of its strong community and were “actually making decisions to buy products.” To turn that pitch into revenue, the company needed to “copy the ad units performing well on other platforms,” like carousel ads that combine multiple images into a single ad, said Anderson Jr., who left Reddit in July.

Reddit will also emphasize the value of its search and product ads, which are tied into the interest-based forums on the platform, said a person familiar with its strategy.

Reddit has taken other steps to build its ad business. This year, advertisers said, it stepped up a training program it has to help agency staff better understand its platform. The push included more actively encouraging and monitoring ad agency staffers to enroll in and complete the program—something ad execs say they did not see as much of in 2022. This program helped pave the way for Reddit to win more ad campaigns, because agencies and their marketing clients had a better idea how to successfully run ad campaigns on Reddit, said one ad executive.

But advertisers also noted that a lot of the campaigns they run on Reddit still require more manual work from them. Ad products including a sponsored version of Reddit’s famous Ask Me Anything question-and-answer format, in which specialists at different types of marketers sit in to answer questions, and Megathreads, in which advertisers put together multiple informative posts on a topic at once, require much more time, attention and in some cases hand-holding from Reddit.

The company has launched tools for advertisers which are designed to make it easier for marketers to test Reddit’s automated targeting capabilities, said a person familiar with its strategy.