The 5 biggest risks for Reddit investors

reddit (RDDT -14.60%) has continued to soar since its initial public offering on March 21st. The social news platform went public at $34, and shares started at $47 and rose to an all-time high of $74.90 just five days later. However, it is currently trading at around $48.

I recently took a deep dive into the business of Reddit, and to be a sustainable investment we need to find new ways to grow our ecosystem, grow our audience, and stay relevant in the changing news aggregation platform market. I have determined that there is.

Today we'll take a closer look at the five biggest risks of the so-called “front page of the Internet.”

Image source: Getty Images.

1. User growth is unpredictable

Reddit ended 2023 with 73.1 million daily active unique users (DAUq) across the platform. This represents a 27% increase over the previous year, but only half of those users were logged in.

The other half simply browsed and visited links on search engines, social networks, and other websites rather than posting new content or interacting with other users. The company hopes to convert these logged-out users into logged-in users so they can monetize them more effectively with ads, but the percentage of logged-in users will actually decrease in Q4 2023. decreased quarter-over-quarter and year-over-year.

In its registration application with the Securities and Exchange Commission, Reddit cited the coronavirus pandemic, the WallStreetBets meme stock phenomenon, the outbreak of the Russo-Ukrainian war, and the release of a popular video game. These unpredictable growth spikes can make year-over-year comparisons difficult, making it more difficult to predict the long-term growth trajectory of Reddit's audience than other social media platforms. .

2. Struggles to monetize US audience

Reddit's DAUq in the US grew 33% year over year, accounting for nearly half of its daily viewers in the fourth quarter of 2023. His DAUq overseas only increased by 21%. However, Reddit's average revenue per user (ARPU) in the U.S. fell 7% year-over-year in the fourth quarter, marking the second consecutive quarter of slowing ARPU growth in the region and its total ARPU also falling by 2% year-over-year. %Diminished.

This is a problem because US DAUq generates 4-5 times more revenue per user than international DAUq. meta platformU.S. and Canada ARPU increased 16% year-over-year in Q4 2023.

3. Changes in browsers and OS may hinder growth.

In its registration application, Reddit states that web and mobile browser developers: apple, microsoftand alphabet We are implementing changes that could “impair” our ability to measure traffic and “advertisement effectiveness” on our platform.

It warned that Apple's new privacy updates to iOS apps and Safari, Google's removal of third-party cookies on Chrome, and other changes could all reduce the company's ad sales. That's not surprising.Because we already have meta and snap Although it has reduced its reliance on third-party data to manage these changes, it's unclear whether Reddit can handle those punches.

4. Relies heavily on unpaid moderators

At first glance, Reddit's financial situation appears to be improving. The company expects sales to increase by at least 20% this year and to break even on an earnings before interest, tax, depreciation, and amortization (EBITDA) basis.

But Reddit still relies overwhelmingly on its army of unpaid moderators to enforce its rules and cleanse its community. The company acknowledges that business may suffer if it is unable to retain or maintain good working relationships with moderators. Reddit offered its top moderators the opportunity to participate in the IPO, but many declined the offer.

By comparison, Meta and other social media platforms typically outsource content moderation to other smaller overseas companies. This practice is also controversial and is still driven by paid workers rather than volunteers. And now that Reddit is public, there could be even more pressure to pay moderators.

5. Expect challenges from generative AI platforms

Finally, Reddit warns that it faces competition from search engines and social networks, as well as generative AI platforms such as OpenAI's ChatGPT and Google's Gemini. Amazon-Supported Anthropology. It acknowledges that instead of visiting Reddit directly, users may choose to search for information on the platform, which “may have been trained using Reddit data.”

While this change may not have much impact on logged-in users who are talking with other users, it could tempt logged-out users who are simply using Reddit to search for information.

All of these issues suggest that Reddit may not have been ready for its public debut. The company is still growing, but it's too early to tell whether its business model is sustainable. So for now, investors should stick to more reliable social media strategies like Metaplatform.