Evaluating Reddit (RDDT) as an investment

wpr101 · September 19, 2024, 10:03pm

Reddit (RDDT) is a website and app which is similar to a message board on different topics called subreddits where users upvote or downvote topics and comments. Each subreddit has moderators who curate content, removing posts which are off topic, offensive, or self promotional. You could think of it as similar to Motley Fool but applying to any topic, and where the top posts with the most likes show at the top. Their slogan for awhile has been that they are the “front page of the internet”.

I am deeply familiar with Reddit have been a user since 2012 when it was a much different site that was largely uncensored and had less moderation. It is my most used phone app by a wide margin. When I had a website that I was looking to promote, Reddit was the only place where the articles I was promoting were able to go viral. This can happen if the article or topic shared gets a lot of upvotes and stays at the top of a subreddit for awhile. Reddit has enough power now that for awhile there’s a term the “Reddit hug of death” which is when a post reaches the top of a subreddit, but the article linked to is not able to scale properly with the traffic directed towards it.

Previously I’d looked into the S1 saw that 2022 → 2023 revenue was 667M → 804M or 21% which did not interest me much looking for high growth. However, I believe there are some significant changes recently with both ads and partnerships mentioned in this last earnings call which make this company worthy of serious consideration for Saul’s board.

On this most recent earnings the company way exceeded their guide,

Guided 240-255M revenue → actual 281M (+54%)
Guided 0-15M adj EBITDA → actual 39.5M

The statistic that has me most interested in the company is “other revenue” grew by 690% yoy to 28.1M which is driven by data licensing agreements with Google and OpenAI.

My biggest concern with this company is the CEO Steven Huffman who posts under the name “spez” on Reddit, and there has been numerous controversies surrounding some of his actions over the years. The most recent one was the manner in which some APIs were shut down, and many subreddits shut down or the moderators took them offline and there was basically a war between the CEO and moderators of different subreddits. I think the company may have moved past this issue now though.

Some highlights from the last conference call on August 6 include,

Steven Huffman - CEO

both revenue and users grew over 50% yoy
positive FCF and profitable on an adj EBITDA basis
342M MAUs, 91 DAUs
number of comments viewed reached new ATH, up 10% from Q1 to Q2
50% of user base outside USA, 45M international DAUs, 44% yoy growth and +11% qoq
France, India, UK, Philippines seeing good results
machine translation of different languages is working well
dev platform is in beta with a few hundred active devs
will begin testing new search result pages powered by AI to summarize and recommend content
partnerships with Google and OpenAI

Jennifer Wong - COO

revenue +54% yoy to 281M, acceleration from prior Q and fastest growth rate since Q1 of 2022
ad revenue grew 41% yoy to 253M
global scale channel including mid market and SMB grew 50% yoy driven by advertiser activation and deepening existing relationships
strength in verticals led by retail, pharma, and financial services
international +49% yoy driver by strength across large and mid market in EMEA
big six agency relationships were growth drivers, and growth across full funnel
made measurable progress against AdTech roadmap in Q2
offering advertisers unique solutions and bringing them closer to communities
continued building out conversion API ecosystem with mParticle, in addition to partnerships with Google Tag Manger and Tealium for one to many CAPI adoption (conversions API), helps advertisers measure more effectively
launched a performance ad solution, Dynamic Product Ads (DPA), early adopters seeing 2x higher return on ad spend
acquisition of Memorable AI, brings AI driven intelligence tools and ad creatives to advertisers to drive performance
launched Reddit ads API to GA
partnerships sports program to Reddit fan communities including highlight videos
other revenue grew 690% yoy, drive by data licensing agreements (Google and OpenAI)
Sprinklr and OpenAI partnerships available for access of content while adding guardrails

Andrew Vollero - CFO

three key financial themes, 1) growth/cost shined 2) profitability inflecting rapidly 3) traction on cash flow, CapEx, dilution & SBC costs
DAUs for quarter 91M, +51%
logged out users 70% of quarterly DAU growth
gross margins 90%, up from 84% year ago, driven by operational efficiencies
12% adj OpEx cost growth
total headcount up 1% qoq, 3% yoy
GAAP net loss 10M, which is 31M better than last year
internal goal of getting to GAAP break even
adj EBITDA 40M, up 30M sequentially and up 75M yoy
adj EBITDA margins 14%, up from 4% in Q1 vs -19% prior year
revenue grew 5x as fast as costs
operating cash flow 28M, +82M change from last year
CapEx very light around 1M
stock comp 67M, 24% of revenue, down from IPO which paid out a lot
cash 1.7B (28M of debt)
Memorable AI acquisition 19.9M cost, 17.1M in cash
new guide of 290-310M, adj EBITDA of 40-60M, includes recently signed partnerships with sports leagues

Q&A

translation services going well
ad load on Reddit is light compared to other social networks (possible additional upside here increasing the load)
working on search that works inside Reddit (most people currently search Google using the keyword Reddit + topic)
not a big player in political ads
the longer someone has a Reddit account they more time they spend there
have headroom on ARPU, and managing revenue and DAU growth - first class problem to have
broadly seeing new user retention going up
contract pricing on hosting is helping margins

The market cap on Reddit is just 10B which seems small for how well known and used Reddit is. There’s a lot of exciting initiatives wether this is translated posts, a partnership with OpenAI, improvements in ads/search, along with better gross margins and profitability. Reddit looks like a promising investment opportunity to me, and I believe it fits the criteria Saul is typically looking for in an investment.

PaulWBryant · September 20, 2024, 4:35pm

Indeed! The question is, is it a one-time bump (trickling in over many quarters) mainly due to the Google deal (I notice Reddit now pops up in most search results…) or is it something more sustainable? I’ve charted the trends. No idea how they’ll continue, though!

That (basically, ARPU) will be the most interesting thing to watch play out. If user growth slows down fast, as one would imagine it has to, this will be the driver of revenue growth. I wonder how we could possibly judge the potential here…Facebook, Pinterest, Twitter, Roku even…they all have very different web real estate on which to sell ads.

Bear
long RDDT (sub-1% position)

wpr101 · September 22, 2024, 1:08am

Reading through the Goldman Sachs Communacopia Technology Conference transcript they said the web platform is rebuilt to be 2-5x faster which also improved search on external platforms like Google. The deal with Google sounds multi-faceted, but what’s still unclear to me is the terms behind the 60M deal. It’s said to cover,

To allow Google to use Reddit posts for training its artificial intelligence models.
To improve Google’s services, particularly Google Search.
To provide Reddit with access to Google’s AI models, specifically Vertex AI, for improving Reddit’s internal site search and other features

As for the deal with OpenAI, the dollar amount is unspecified but encompasses the following,

Content Access: OpenAI will have access to Reddit’s Data API, which provides real-time, structured, and unique content from the platform.
Enhanced Reddit Content in ChatGPT: OpenAI will bring enhanced Reddit content to ChatGPT and new products, helping users discover and engage with Reddit communities.
AI-Powered Features for Reddit: This partnership will enable Reddit to bring new AI-powered features to its users and moderators. Reddit will be building on OpenAI’s platform of AI models to implement its vision.
Advertising Partnership: OpenAI will become a Reddit advertising partner

I wonder how we could possibly judge the potential here…Facebook, Pinterest, Twitter, Roku even…they all have very different web real estate on which to sell ads.

The top tier of Facebook/Instagram is about ~$40 ARPU and Reddit is in the ~$5-10 range. However the use cases are different as they mentioned in this conference that a network like Facebook revolves around friends, family, and DMs. Reddit is more about connecting communities, and there are also more anonymous users.

The CEO said they don’t want their ads to be creepy as in make it too obvious with how much a user is getting tracked. He gave the example, in r/skiing a user might see an energy drink ad as the advertiser would be targeting outdoors people who may want an energy drink.

Some other points from the Goldman Sachs Communacopia Technology conference were,

CEO says first two quarters came out of the gate strong, did everything they wanted to
IPO behind us now as lockup period is over
LLMs are translating content into other languages, human quality translations of the entire Reddit Corpus
LLMs make moderation better, can detect bullying or rudeness and automate which formerly required humans
new user retention has become much better connecting users with their home on Reddit
app is now easier to use, faster, easier on eyes
web platform is rebuilt 2-5x faster, improved external search on Google and others
logged is users growing 30% yoy, highest rate in years
19 years old now product
product philosophy is no matter how big Reddit gets, want it to have a small feel
90M DAUs half US/half outside
Reddit is more intentional than traditional social media
translation of Corpus into French is going “really, really well”
starting in Spanish now which as 1B speakers, Portuguese and German also a nice foundation, will get to scale
two decades worth of human conversation of Reddit which is colloquial and good for AI training models
photoshop request is a like a small business on top of Reddit, people pay $5-10 for edits on photos
monetization primitives so can charge users for things, or start a small business
did partnerships with many of the major leagues NFL, NBA, MLB, NASCAR, to make sure we have licensed high quality content and video so users can discuss
want to give the moderators good tooling, giving the internal safety tools that Reddit has
spend a lot of time with moderators on Zoom calls, doing in person meet ups, Adopt an Admin program
mods are more important constituency on Reddit and work side by side with them, want to get a native understanding of the challenges they face
long road map but straight forward, improve targeting, measurement and performance
core of strategy: “every user on the Internet can be a Reddit user”
still feels like a startup even though one of the oldest social media platforms
organizing around communities and interests which is different than traditional social media
for ads, moving away from using personal information to using context and interests

wpr101 · September 24, 2024, 12:46pm

Was able to track down the ARPU numbers from FinChat which has a nice KPI section for Reddit. This is how much Reddit made per user over the quarter, and the slight dip in numbers is from the addition of more logged outs coming from Google and other search,

ARPU - USA
$4.6 → 5.2 → 5.3 → 5.5 → 4.8 → 4.9

ARPU - RoW
$1 → 1.1 → 1.1 → 1.3 → 1.1 → 1.2

ARPU - Overall - all users
$2.7 → 3 → 3.1 → 3.4 → 2.9 → 3.1

Adding a couple more items learned from the JP Morgan tech conference in May,

more than 100k active communities or subreddits
social media organized around the Fs: friends, followers, family, and famous people
Reddit organized around community
each post and comment starts out at 0 points and has to earn its visibility
adding about 1M users a month
Google crawler likes speed and faster the page loads the higher the rank
big picture Reddit has what people are looking for and Google helps people find things
increasing premium on content coming from real humans
spam websites which produce AI content are going to get hurt in this transition
50/50 logged out/in and most logged out traffic comes from Google which is not a surprise
logged in users are bedrock of business
back in 2015 was closer to 80 to 90% of logged out users
growth in native apps has helped logged in users
Reddit is like a city and subreddits are neighborhoods
talked about hectic two weeks with standoff between API pricing and moderators, mods wanted better tooling which they delivered on, have de-risked future incidents like this happening
big tech has been the top category of advertiser
ads product is getting better
unique thing about Reddit is we’re open for business, other platforms of scale have content that is closed
do not license private data, won’t leave Reddit or be sold
will only do licensing deals if following on terms such as not reverse engineering user identity, or not reselling data
another class of companies are smaller non-AI companies that want training data, such as financial institutions, investors, and social listening services - “a lot more customers in this space”
Google indexes translated content and serves back users from French Google - didn’t anticipate this but a nice bonus
Dev platform allows posts which are code, can start building apps within Reddit
users will be able to make money from other Reddit users using the Developer Platform, and will have exclusive content or paid areas on Reddit

A couple more takeaways from their Q1 report from May 2024,

continue to make Reddit faster, safer, and easier to use
updated native apps with instant comment loading
machine translation can unlock mostly English corpus for foreign languages
revamped version of user awards and Reddit gold
WallStreetBets has live ticker page, sports subreddits with live scoreboards
paradox, more content on internet is written by machines, increasing premium on content which comes from real people
two decades of authentic conversation between people, earnest advice, honest reviews, answering questions on every topic imaginable
other revenue was 450%+ yoy to 20M (Q2 was 28.1M)
ad revenue growth was driven by increasing impressions, but saw a yoy decline in pricing
no vertical exceeds 20% of ad revenue
international growth driven by strength across large and mid market customers in EMEA
AI driven headline generator with Simple Create, for small businesses, seeing promising results
integrations with Tealium, leading customer data platform and Google Tag Manager
data deals are bifurcated, handful of large players and then lots of smaller opportunities
growth across all aspects of funnel, driving conversions to logged in
improvements in product quality, sign up has gotten more efficient, onboarding gotten better and improvements in home feed relevance
tailwind with Google, can see in logged out users
agreement with Google is for training data, nothing on improved search stats showing up
in the AI era, people value authentic content more
analyst questioned why guide is only for mid-30s when current Q is 48% (landed at 54% growth in next Q though)
a couple tailwinds in Q1, will see if they continue in Q2
app install and conversions going well at bottom of funnel, advertisers see how serious we are about driving bottom of funnel growth
lots of potential in monetizing logged out users
translation technology simply didn’t exist a year ago, now can translate entire Reddit corpus into another language with human level translations
user privacy very important in how crafting deals to license data

dlbuffy · October 30, 2024, 7:01pm

Ah! This the thread I missed in the past.