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Reddit being public is weirdly poetic. The platform’s r/wallstreetbets subreddit shocked the world when it catalyzed the Gamestop short squeeze in early 2021. From January 8th to January 29th, Gamestop went from $4 to over $80. Millions of users poured in as the leader of the movement, Keith Gill (aka Roaring Kitty) posted screenshots of his account balances (#diamondhands). If this all seems ridiculous to you, well, it is. But you need to understand that sort of psyche to understand Reddit. It’s a different sort of social media; one where it’s not about making other people jealous as much as it is telling them they’re wrong (I kid! Sort of!)
Reddit has over 100,000 individual forums called subreddits. You can find a subreddit, denoted by “r/”, for everything under the sun. For example, even within the niche of retiring early, you have r/fatFIRE (financially independent retire early but on steroids), r/leanFIRE , r/leanishFIRE, r/chubbyFIRE, or just r/FIRE.
The platform works through a voting system. Upvotes get more eyeballs and give users “karma” which are fake internet credibility points. What’s important to understand is that Reddit isn’t so much about following specific people but following topics. Therefore, it’s not very self-promotional, but rather straight-forward. Further, since most users are anonymous, it’s a great tool for getting unfiltered feedback. This is one reason why management is excited to license its content for training large language models. Reddit is a huge source of text with 16 billion individual comments.
But before we get too far into this, let’s back up to quickly cover the founding story. The company was founded in 2005 by Steve Huffman and Alexis Ohanian, in the first batch of Y Combinator. They actually had an original plan to let people order food via SMS but it didn’t work so they pivoted to what Paul Graham later called, “the front page of the internet.” What started as a simple forum website, frankly, hasn’t changed a whole lot despite the numerous leadership changes. The first change was in October of 2006, when Conde Naste bought the website for $10 million, just a year after its founding. The founders left in 2009 after getting bored with the stodgy culture of the publishing giant but later returned in 2015 after it was spun out as an independent company. The parent company of Conde Naste still owns 34%.
What’s also interesting is that Alexis Ohanian’s name is nowhere to be found in the S-1. Ohanian, husband to Serena Williams, was really the face of Reddit but he stepped down amidst the George Floyd riots. Ohanian now runs a VC firm but he has no involvement with the company and Huffman is the CEO. Speaking of the cap table, OpenAI’s Sam Altman owns 9% of the company as he led a $50 million funding round in the early days and Tencent owns 11%.
One thing that stood out from the S-1 is that Reddit’s future may look different from its past as a simple forum website. From the recent $60 million data licensing deal with Google to potentially taking a cut of e-commerce transactions within the platform, Reddit’s ambitions are larger than I initially thought. This could be overly promotional for Wall Street but the passion of the users coupled with the sheer volume of user generated content has given the company a treasure trove of data. I will be keeping a close eye on the company’s “other” revenue, since advertising currently makes up 98%. Revenue over the last year was ~$800 million and it grew ~20%. Gross margins were 88% in the last quarter but the company still lost quite a bit of money, with -17% GAAP EBIT margins for the year and -10% annual FCF margins.
I put out what I thought was an innocuous tweet (yes, I’m going to keep calling them tweets for now) about Reddit’s large R&D expenses and it got quite a bit of engagement. The fact that the company spends 55% of its revenue on engineering salaries is substantial considering I’m an active user and I can’t really remember any new features. Sure, maybe the color palette is slightly different but to maintain infrastructure for a forum site, it’s surprising how high R&D expenses are. Compare this to Zoom, which has much higher infrastructure costs – it only spends about 15% of revenue on R&D, though they do have a chunk of employees in China. A more apt comparison might be Datadog, which is notorious for spending a lot on R&D. They are only at 45% of revenue. I just don’t see how Reddit should be spending more on R&D as a percentage of revenue versus Datadog, which has to constantly be pumping out new features and HQ’d in New York City.
Despite the somewhat bloated cost structure and trading for 10x forward sales, I wouldn’t be surprised to see the stock continue rocketing higher. If the Gamestop Mania proved anything, it’s that Reddit is a powerful platform with an avid user base.
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