00:02:53:11 – 00:02:59:22
Daniel Mahncke
Thanks, Shawn I’ve never been a user Reddit, so I don’t know too much. Maybe just get ahead with it.

00:03:00:00 – 00:03:37:10
Shawn O’Malley
Okay, without any further ado, I’ll do my pitch over the course of today’s episode while Daniel gives me feedback and ask questions. Let’s start by taking a moment to understand what Reddit is all about. With nearly 380 million weekly active users, 2 billion plus posts, and more than 20 billion comments, Reddit is one of the largest sources of human perspective and conversation on the internet, and I really love how Reddit CEO Steve Huffman describes what makes the platform and the company so unique.

00:03:37:12 – 00:04:04:12
Shawn O’Malley
He says, quote, I often compare Reddit to a growing city. Today, our city has more than 100,000 unique neighborhoods, which we call subreddits, and each has its own slang, vibe, sense of humor, and both written and unwritten rules. We did not create these communities, Reddit’s user said. Our role is to develop and maintain a common infrastructure that helps keep the city secure and thriving with space to grow.

00:04:04:14 – 00:04:49:02
Shawn O’Malley
And correspondingly, the company’s mission is to quote great community belonging and empowerment to everyone in the world. It’s a very ambitious goal, but they do so through Reddit’s ecosystem of subreddits, which are again communities organized by interests that allow people to explore their passions, learn, express themselves, and understand other people’s experiences and perspectives and recommendations similar to X aka Twitter, you could say Reddit has what you might call a for you page, where popular and trending posts from any subreddit are shown in this scrollable feed, or if you want to just join a bunch of investing and finance subreddits, for example, you could cultivate your entire feed to be just that specific type of content

00:04:49:04 – 00:05:19:06
Shawn O’Malley
and central to Reddit’s functionality. And really identity is the voting system. Users can add votes and comments on posts they find interesting, informative, or entertaining, and then they’ll downvote those that don’t contribute to the conversation. It’s a very democratic approach that ensures the most valued content rises to the top. And so when you see a specific subreddit, for example, typically the most upvoted content is what you’ll see at least the most upvoted recent comment.

00:05:19:08 – 00:05:42:17
Shawn O’Malley
And in Reddit world, it’s not survival of the fittest, but survival of the most upvoted. And the algorithm amplifies these posts. Like any social media platform, with the caveat being that each major subreddit has its own viral content that largely wouldn’t otherwise be seen by anyone else. Just how communities on Reddit can become so closely knit and maybe idiosyncratic over time.

00:05:42:17 – 00:06:14:01
Shawn O’Malley
To kind of put it nicely, Wall Street Bad is a really famous example of this. I think we all know so much so that there’s a Netflix documentary on the subreddit and how it drove the madness behind GameStop in 2021. Were you not only had millions of people conspiring together to move the prices of public stocks with various options trading strategies, but the community also took on a life and personality of its own to this, that any outsider who looked at the subreddit would have thought it was just indiscernible nonsense.

00:06:14:01 – 00:06:39:08
Shawn O’Malley
And from firsthand experience, I can attest to that. It’s kind of like the game of telephone, where you say something to one person and they pass it around the room, and by the time it gets back to you, it’s completely different, right? It is almost an immuno response that some of these subreddits, like WallStreetBets, have formed to protect themselves from outsiders because they’ve had such a bright spotlight shone on them.

00:06:39:10 – 00:07:10:17
Shawn O’Malley
And WallStreetBets members, that’s just one example have their own language in a way, and it kind of combines this self-deprecating online meme culture with esoteric Wall Street options trading parlance and the forum’s description is literally like fortune found a Bloomberg terminal, and that is perfectly on the nose. So I remember during pandemic lockdown, spending hours trying to decode these various Wall Street bat posts to understand the references and strategies being discussed out of curiosity.

00:07:10:17 – 00:07:33:15
Shawn O’Malley
And it was like you really had to spend hours just to understand the jargon and the culture that was kind of happening there. And it is a weird, if not very concerning place that advocates for a lot of things I don’t advocate for, like elbowing one’s life savings and basically lottery tickets. But this is kind of par for the course for internet forum culture.

00:07:33:17 – 00:08:02:02
Shawn O’Malley
And the point being, for better or worse, many of these subreddits evolve in their own vacuum. They can become increasingly fringe and recognizable only to long term members of that subreddit, which, from a user loyalty and engagement perspective, it’s actually a good thing you’ll find some very passionate users of these subreddits, which, again, is sort of a euphemism for saying many of these people are chronically online and addicted to hanging out there, which I’m sure Reddit is glad to have.

00:08:02:02 – 00:08:05:22
Shawn O’Malley
It’s a good problem to have for them as a business.

00:08:06:00 – 00:08:34:01
Daniel Mahncke
It is certainly confusing place when you first visited, because it’s nothing like any other social media. Until you told me how much you liked Reddit, I never actually used the app. If anything, I landed on Reddit through a Google search and the only time I have actively browse it was, as you mentioned, with all this GameStop stuff happening, but the value invested in me was never drawn to the GameStop mania, so I quickly left without trying to decipher all the jargon used.

00:08:34:03 – 00:08:56:15
Daniel Mahncke
However, I’ve tried it now for some weeks, and I realize what you mean when you say the power of Reddit. The smaller the niche and the subreddit, the higher is the level of high quality opinions that you can get. There seem to be some real experts on almost every topic that you can imagine, and that is definitely valuable.

00:08:56:17 – 00:09:25:07
Shawn O’Malley
I have to say for anyone the eyes. If you’ve never used Reddit when you first discover it, it is a really exciting place. As you say. Daniel. I remember having this moment where I realized that there was a passionate community for about everything imaginable. It seemed, whether it be for specific communities around TV shows and musicians, subreddits for specific cities and towns and countries, your fitness, hobby, personal finance, travel, and again, really whatever you can imagine.

00:09:25:07 – 00:09:55:11
Shawn O’Malley
And there are subreddits for people dealing with specific medical conditions, subreddits devoted to certain types of cooking and anime, specific types of humor, dieting, religion, and the list goes on and on. It’s so powerful to be able to quickly find a community of people devoted to discussing a certain topic, and then immediately coming in and joining them. If you want to learn Buddhism, you can just jump right into the Buddhism subreddit and start asking questions, and you’ll have some random guy who’s been practicing for 20 years give you some insights and wisdom.

00:09:55:11 – 00:10:23:05
Shawn O’Malley
And that’s that is what is so powerful about Reddit to me. Looking for restaurant recommendations in Paris? Go to the Paris subreddit and you’ll probably get way better recommendations. And you can find on Google learning about different types of credit cards, planning trips, finding stock ideas, or even getting fashion advice. Those are all some of the powerful ways I have crowdsource knowledge, while also actually connecting with real people and not chat bots or just going through search engines.

00:10:23:07 – 00:10:43:23
Shawn O’Malley
And I often find that people will share tidbits you just never find in a normal article or chat bot explanation, and those insights can be extremely helpful. And also, as we’ll talk about over the course of the episode, make Reddit such a compelling place to potentially advertise on and to grow as a social media business.

00:10:44:00 – 00:11:08:20
Daniel Mahncke
The platform personally reminds me of what forums used to be in the early 2000s and in the 20 tens, but it’s all put together in just one place now. There seem to be two types of social media companies. There’s the ones like Instagram, Facebook or YouTube, which seem to be money printing machines. And you have this sort of Snapchat which are chronically unprofitable.

00:11:08:22 – 00:11:20:02
Daniel Mahncke
The main differentiator is, well, they can build a business model around their active users. Could you describe Reddit’s business model and how they try to monetize their audience?

00:11:20:04 – 00:11:46:23
Shawn O’Malley
Reddit makes money in a few ways, primarily focusing on advertising. And then there’s also premium memberships and even the sale of digital goods, you might call it. These are called Reddit coins and NFTs as well. The advertising part of the revenue model works in such a way that advertisers can target specific subreddits or the broader Reddit audience through sponsored post sponsored comments and these sidebar advertisements.

00:11:47:00 – 00:12:17:12
Shawn O’Malley
Then, with the premium memberships, users can pay to remove ads, as well as having the option to purchase Reddit coins that could be used to award certain posts. I know we’re talking about a little bit before the episode of maybe we don’t totally understand why people would spend money on these, but the idea is that, for example, if there’s a post that you especially agreed with or found really helpful, you might use real world money to buy Reddit coins, which you could then use to purchase an award to give to someone for that post you enjoyed.

00:12:17:13 – 00:12:44:06
Shawn O’Malley
And that that probably sounds crazy to some people, but I can attest to the fact that it is a real thing. I’ve never spent money on Reddit coins to buy a Wordsworth, but sometimes I’ll see a post with a dozen awards. It’s a way for people to use real money to signal the value of a post, and it’s inside, signaling to more people that it’s worth their time to read and engage with, which really aligns with the community first culture of Reddit.

00:12:44:08 – 00:13:11:10
Shawn O’Malley
Like I said, if I hadn’t seen so many instances of post receiving awards, I’d struggle to believe that this was a real thing. And it’s very different than having your favorite Twitch streamer and sending them money directly. If you get an award, you don’t get any money from it. It’s completely just for the clout. I know I have received awards for posts that I’ve done, which is this really weird feeling, because you’re sitting there and you’re like, I don’t get anything out of this.

00:13:11:10 – 00:13:26:16
Shawn O’Malley
I’m not. I’m not getting real money. But it is a source of pride, especially for people who spend a lot of time on Reddit. And and so it’s kind of alluded to there are a lot of people who’s been a lot of time on Reddit and take it very seriously, just to kind of paint some more color around this.

00:13:26:18 – 00:13:51:18
Shawn O’Malley
You could give an award to somebody called the I’ll drink to that award, which is a way to kind of toast somebody virtually, and it costs 50 Reddit coins to do so. And for context, you can buy 100 coins for $1.79. So giving that one award away is worth $0.90 of real money, and some awards cost more, and others are cheaper, and the more expensive ones are naturally more prestigious.

00:13:51:20 – 00:14:27:23
Shawn O’Malley
People do use awards sparingly, but it is a legitimate way, from Reddit’s perspective, to reward high quality posting while also generating more revenue without any incremental costs. And with the premium add free memberships. You also get an allotment of these coins that can be used to buy awards with. That is sort of a nice add on. They can use a bundle with an ad free experience, and even though the awards aren’t exactly real, the revenue for Reddit very much is so generating tens of millions of dollars for the company each year, which is not their core business, but it does help pad out their profitability on the margins.

00:14:28:01 – 00:14:38:10
Shawn O’Malley
Overall, I think advertising counts for something like 92% of Reddit’s revenues. The premium memberships and Reddit coin sales are again mostly rounding error and in not core parts of the business.

00:14:38:16 – 00:15:02:13
Daniel Mahncke
But when I first heard about awarding posts, like you said, I imagined a similar system to Twitch, and even that sounds weird if you would ask people in their 50s, I mean, why donate money to wealthy streamers? But it’s part of the culture, and Reddit has a similar focus on culture, so maybe it just works, but hearing the word post doesn’t even get the money.

00:15:02:18 – 00:15:30:08
Daniel Mahncke
It makes it somehow weird for me as well. But it could be that I just getting old now. Whether IPO last year and IPOs are often surrounded by huge hype and accordingly also high prices. And you mentioned you even took part in that IPO. The exuberance in 22 had shifted a little of the hype surrounding IPOs. How did Reddit’s IPO go back then and how did it develop afterwards?

00:15:30:10 – 00:15:57:03
Shawn O’Malley
The company iPod in 2020 for the over $6 billion valuation, and that marked the first major social media IPO since 2017. The stakes were fairly high, you might say, because we had gone through this huge slowdown in the IPO market across 2022 and 2023. After the Covid era market bonanza and its interest rates are rising, and Reddit was one of the first big companies to test the waters.

00:15:57:05 – 00:16:34:10
Shawn O’Malley
And as a tech company in particular, people were really paying close attention to what happened with the market being so concentrated around a handful of these really powerful tech companies like Nvidia, Microsoft, Google and Amazon. Reddit’s IPO was a real litmus test of investors demand for yet another tech company platform. And honestly, if it hadn’t gone well, I think it could have triggered a good bit of panic over whether the Nasdaq index and Big Tech had become overextended after what was and still is, a really long winning streak.

00:16:34:12 – 00:17:03:18
Shawn O’Malley
And obviously the bull market continued on since then, even though we’re hitting some turbulence now as we recorded this episode and Reddit’s IPO was met with a very warm welcome, I would say the IPO was something like five times oversubscribed, meaning there was considerably more demand for Reddit shares than the actual amount of new shares issued. All in all, Reddit issued over 22 million new shares and raised over $500 million in new capital.

00:17:03:18 – 00:17:30:22
Shawn O’Malley
So it was a success, and there was another $200 million raised from insiders who were cashing out some of their existing stakes, or some people at least having invested in the company over 15 and almost 20 years ago previously. What was really interesting about the Reddit IPO, though, is that Reddit wanted to create a sense of ownership among its users and opted to include highly active users and moderators in the IPO so that its top users could become shareholders.

00:17:31:03 – 00:18:03:20
Shawn O’Malley
That’s sort of where I come in. Normally, these kinds of things are reserved for big institutions, and everyday retail investors don’t have much of a chance to meaningfully participate. But nearly 1.8 million shares were set aside specifically for Reddit users. That was divided up across tens of thousands of Redditors like myself. I had the chance to participate in the Reddit IPO because I moderate our companies subreddit, and given that the stock has been roughly a six bagger from the IPO price at least to its peak.

00:18:03:22 – 00:18:29:08
Shawn O’Malley
And because of that, I really wish I had bought a lot more and held it for a lot longer than I did. I knew it was a special opportunity to participate directly in the IPO, since you can basically buy shares from the company before they trade on stock exchanges. If there’s enough hype, stocks usually pop when the IPO is were analysis all of a sudden trying to rush in and literally snap up shares.

00:18:29:10 – 00:18:50:04
Shawn O’Malley
Even though I was a fairly active user of Reddit and continue to be, I just wasn’t all that excited about investing in what was another unprofitable social media platform, especially since there was this huge user revolt going on around the same time. I just wasn’t inspired to put much money into it, and that was probably a big mistake.

00:18:50:06 – 00:19:14:02
Shawn O’Malley
The stock jumped 50% on his first day. I felt like I was playing with house money, and I immediately cashed out, in part because I just didn’t feel like I could estimate the intrinsic value of this unprofitable social media platform. And I knew I was gambling. Right. And I think that’s okay to do from time to time with small amounts of money, as long as you understand that you are, in fact, gambling.

00:19:14:04 – 00:19:46:17
Shawn O’Malley
But clearly I should have held on because the stock has been a massive winner and we’ll get into it with the valuation later. But it seems so obvious now that a platform as big as Reddit was. So many devoted communities could be worth much more than $6 billion, which was the IPO valuation. But, you know, they say hindsight is always 2020 in terms of web traffic and recognition, though, Reddit is up there in the big leagues of internet companies like Netflix, and it’s worth considerably less.

00:19:46:19 – 00:19:53:14
Shawn O’Malley
So there is a sizable gap between Reddit’s reach and their monetization. But I do think that’s changing quickly.

00:19:53:16 – 00:20:26:03
Daniel Mahncke
Well, as you said, looking back, it’s always easy to see how things played out. But knowing you as an investor and that you were a long term user, I would think you had reasonable doubts about what its financial prospects. And today we can see if those were justified or if you just missed out on Reddit’s business potential. Maybe your doubts also had something to do with the user revolt that happened a year prior to the IPO, when Reddit CEO Steve Huffman announced that third party apps using Reddit’s data have to pay fees going forward.

00:20:26:05 – 00:20:57:08
Daniel Mahncke
Those apps are used by moderators to help them checking and clearing content on their subreddits, and after the announcement, subreddits protested by closing to the public, attempting to pressure Huffman into taking back those fees, but they didn’t have any success. So in my perception, Huffman seemed pretty stubborn and also lost quite a lot of goodwill with the users as one of those long term users, what’s your take on that and should you have handled that differently?

00:20:57:10 – 00:21:26:01
Shawn O’Malley
The revolt against Reddit’s management was really confusing to me at first. A lot of the big subreddits found these very unique ways to protest what they saw as the commercialization of their beloved platform by a group of suits who wanted to polish things up. As Reddit transitioned to eventually being a public company like it now is. And before I could probably really explain the revolt, I think we have to understand more about how people use Reddit.

00:21:26:03 – 00:21:51:01
Shawn O’Malley
Reddit very much has its own culture, and as such there are just different behaviors that are more and less acceptable. And what is pretty universally hated on Reddit, and really across some of the more decentralized parts of the internet, is anything that comes off as too corporate or too salesy. A lot of Redditors have these very refined BS detectors because this is, after all, the internet.

00:21:51:01 – 00:22:15:20
Shawn O’Malley
And if you spend a lot of time on a bunch of different forums, you just get really good at snuffing out genuine posts versus things that are fiction or posted with ulterior motives that inauthentic City really stinks to people on there, and the ethos behind Reddit is of decentralization and breaking down barriers to information. So, for example, linking to a paywalled source is just very taboo.

00:22:15:20 – 00:22:53:12
Shawn O’Malley
It does not come across very well and the semi sins throughout the platform for a bunch of other things. So you can imagine if your product review comes across as too blindly favorable, you’ll be accused of shilling on the company’s behalf. And again, Reddit is about authenticity. Real people using pseudonymous profiles to share their most genuine thoughts to an extent that they might not otherwise be comfortable doing publicly, which breeds an environment that can be harsh to outsiders, which is part of the reason I was hesitant to invest in Reddit for any meaningful period of time beyond its IPO, because it’s a tough place to do advertising, or at least it used to be.

00:22:53:12 – 00:23:15:17
Shawn O’Malley
I should say. Ads go against the autonomy that so many subreddit communities pride themselves on. So with all of that context, I’d say the revolt had to do with the fact that Reddit was perceived to be going corporate ahead of the IPO, and there was a lot of fear over how that might ruin the communities that hosted there.

00:23:15:17 – 00:23:39:11
Shawn O’Malley
And cultivated over 10 or 15 years. And that fear manifested in one of the biggest ways imaginable when Reddit crack down on third party apps, as you said. So here’s a good article from PBS at the time that described the episode in June 2023. They said, quote, if you hopped on Reddit to scroll through your favorite forums this week, you may have encountered private or restricted messages.

00:23:39:13 – 00:24:10:03
Shawn O’Malley
That’s because thousands of subreddits chose to go dark in an ongoing protest. Some controversial changes announced by the online discussion network and PBS continue saying the blackout, which began Monday, emerged out of outrage over Reddit’s upcoming changes to its API access. Notably, the company’s plan to start charging high usage third party apps who have long used the Reddit data at no cost to build resources for users not available through the official site or app.

00:24:10:05 – 00:24:30:12
Shawn O’Malley
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00:24:30:14 – 00:24:51:03
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00:24:51:05 – 00:25:04:10
Shawn O’Malley
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00:25:04:15 – 00:25:21:08
Shawn O’Malley
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00:25:21:10 – 00:25:36:05
Shawn O’Malley
Not bad for a little side hustle. Maybe you’re someone who frequently travels for work or has a second house. Whatever it is, if you’re gone for scented periods of time, rather than letting your home drain cash out of your pocket, why not put your house to work for you? If you have a second home, travel often or away for extended periods of time.

00:25:36:09 – 00:26:03:08
Shawn O’Malley
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Shawn O’Malley
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00:26:29:00 – 00:26:56:01
Shawn O’Malley
Full service, real time updates only in iOS mobile app. See guaranteed details at turbotax.com/guarantees. Basically, the affected users would use these third party apps to access features that were otherwise unavailable in Reddit’s official app, and these were tools for content moderation and even accessibility aids for folks on visual or hearing impairments. And some of the protests just got really, really weird.

00:26:56:01 – 00:27:21:02
Shawn O’Malley
Interior Reddit fashion. Some of the largest communities on Reddit devoted to sharing memes and GIFs decided to solely post about the comedian John Oliver, for example. So every post on these subreddits for at least a few days was linked to the John Oliver, who’s the host of HBO’s The Last Week Tonight Show. And then there were other subreddits who also protested by this is maybe a little bit more concerning for Reddit.

00:27:21:06 – 00:27:50:01
Shawn O’Malley
They labeled themselves as being not safe for work NSFW, which is something you’ll see across Reddit, and that is a tag that is basically meant to one signal that the content is not appropriate for anyone under the age of 18, but also two means that it can’t be monetized with ads any longer. So if you had all these communities self reporting that they were posting mature content, even if they weren’t, that was potentially cutting off a lot of content for Reddit to monetize with advertisements.

00:27:50:03 – 00:28:21:02
Shawn O’Malley
The long and short of it is that after the initial protests of third party API usage for subreddits that remained blacked out, the company threatened to effectively remove any mods who were holding up the return to normal. So the company was like, you’ve had your time to protest, we’re done with it, let’s move on. And of course, much of the remaining groups of these irritated subreddits capitulated, and they came back online out of fear that they might lose their moderating responsibilities and that new mods would be installed.

00:28:21:07 – 00:28:44:22
Shawn O’Malley
But it was sort of a short term solution, because it was a reminder to mods generally, that there are these people who spend a ton of time managing and building these communities on Reddit, but they don’t truly own them or control them, even if they were the ones who founded them. And it’s a sensitive power balance because from an investment perspective, mods essentially provide free labor to Reddit.

00:28:45:00 – 00:29:13:09
Shawn O’Malley
It’s a Reddit really does depend on keeping them reasonably satisfied. They provide a real service to the platform. These unpaid Reddit moderators clean up the platform, and they set these strict rules of engagement for their respective subreddits, which is why the platform is generally much more authentic and filled with fewer bots than a platform like X, which takes at least it used to a much more top down approach to moderation.

00:29:13:11 – 00:29:44:20
Daniel Mahncke
Because of Reddit’s dependency on moderators. I was so surprised to see that Huffman even threatened to just replace them. Community dynamics on Reddit are complex, so it’s not easy to judge how this would have impacted them, but I would imagine it would have caused an even bigger outcry than the third party apps. Another recent decision by the management has been to monetize its corpus of user posts through licensing deals with chat bots like ChatGPT.

00:29:44:22 – 00:29:52:10
Daniel Mahncke
What would you say is that all about? And what’s your take on that move in terms of a business decision?

00:29:52:12 – 00:30:15:17
Shawn O’Malley
I appreciate you bringing up the whole data licensing thing to I, because this is an important part of the story, or at least something that has generated a lot of intrigue as we all try to figure out the new status quo for publishers in this post. ChatGPT world, where LMS have a ravenous appetite for new data to be trained on, and they’ve basically already been trained on the entire internet.

00:30:15:19 – 00:30:49:10
Shawn O’Malley
With Reddit, though, every day you have millions of new posts on a range of these neatly organized topics with full conversations playing out in comment threads. And all of that, I’d imagine, is a treasure trove for AI models who are fundamentally trying to learn how to think and sound like humans. So yeah, Reddit has inked deals to license its data to a few different AI developers, including OpenAI and Google, and those licensing fees comprise almost a 10th of the company’s entire revenues at this point.

00:30:49:12 – 00:31:17:01
Shawn O’Malley
Funny enough, Sam Altman of OpenAI actually owns a hefty stake in Reddit after investing in the company over a decade ago. So there is a relationship there between the two companies. You probably wouldn’t have expected Reddit to be tied closely to the AI hype cycle in markets, but it definitely is. And that’s also probably why we’ve seen it sell off so harshly in the past few weeks, as the AI narrative has been completely disrupted by China’s deep sink model.

00:31:17:01 – 00:31:39:20
Shawn O’Malley
But that’s a conversation for another day. Maybe. I would say, though, that in all, it’s hard to anticipate whether this will be an enduring part of the business. I could easily imagine at some point these models would no longer need access to Reddit’s data as they advance and move past the training stages, which are kind of front loaded with lots of data and demand for things like Reddit posts.

00:31:39:22 – 00:32:07:23
Shawn O’Malley
But I’d rather focus anyways just on the core business without the licensing revenues, because there’s just no way to know how sticky they’re going to be. On the other hand, while I don’t want to bank on these AI licensing fees, it is fair to say that they need to be continuously fed data to remain up to date, and Reddit is as good a source of any or up to date data on what’s happening on the entire internet.

00:32:07:23 – 00:32:10:20
Shawn O’Malley
That’s sort of its entire purpose of existence.

00:32:10:22 – 00:32:34:06
Daniel Mahncke
Yeah, that’s a good point. When I heard about the deal, I felt like Reddit just struck a deal to get at least something out of what is happening. Anyway. We all know that GPT is training the models for years now on pretty much every data available on the internet. So this is a way, as you said, with 10% of revenues, pretty significant to still bank in on that without just sharing your data for free.

00:32:34:08 – 00:32:47:12
Daniel Mahncke
But it does not seem like it’s a sustainable part of a long term business model. Since you just mentioned the core business, I would take that opportunity to ask, how is it doing? Since the IPO.

00:32:47:14 – 00:33:13:07
Shawn O’Malley
By all accounts, is doing well. AD revenues have grown 60% year over year. And what’s compelling there is a Reddit offers some really unique advertising options. It’s not entirely just harvesting user data and selling targeted ads, though. That is a big part of what they do, but not all of it. One of the more differentiated forms of advertising that they’re able to offer is is Sponsored Amaz.

00:33:13:09 – 00:33:39:08
Shawn O’Malley
And for anyone who doesn’t know, Amazon’s for Ask Me Anything. And it’s a popular format specifically on Reddit, where someone with compelling or unique life experiences offers to answer all the questions that people could ask them over a given period of time. So this could be a musician and promoting a new album and doing a two hour AMA where they answer questions about what it’s like to be famous or write music or whatever.

00:33:39:08 – 00:34:10:20
Shawn O’Malley
Or it could be an AMA about beating cancer or being born with some strange medical condition. And I’ve even seen Ray Dalio de Armas. So it really I mean, anyone could do it. And that’s one of my favorite things about Reddit. There are all kinds of AMAs. And like I said, Reddit has tried to tap into that by helping advertisers do sponsored AMA sessions as a way to generate brand awareness and have authentic, organic interactions with real people online.

00:34:10:22 – 00:34:48:23
Shawn O’Malley
And to go back to AI for a moment, this is something they’re apparently leaning on heavily to, to revamp their advertising business by using it not only to help improve their ad targeting, but also user engagement by predicting, for example, how well certain users will respond to different types of ad copy and images. And as a sort of another way to look at the health of advertising on Reddit, I should add that click volumes on ads have doubled in the last year, which is a really great sign that advertisers are choosing to spend more on promotions across Reddit and getting a better bang for their buck in terms of the cost per click, which creates

00:34:48:23 – 00:35:12:00
Shawn O’Malley
this flywheel effect, where it will probably only attract more advertisers to spend more, and so on. Its number of weekly average unique users is also up over 40%. So the business is really spreading fast on all fronts, and building a powerful flywheel where more users attracts more advertisers who provide funding to Reddit to attract even more users and collect better data on said users, attracting even more advertisers, and so on.

00:35:12:05 – 00:35:40:23
Shawn O’Malley
And if I were to be a real Reddit bull for a moment, what’s exciting about Reddit is how under monetized the platform is and has been, the average Reddit visitor generates the equivalent of $0.04 in revenue per day versus on Facebook and Instagram. That number is close to being three times higher. From sponsored comments to sponsored AMAs and ads targeting specific subreddits like a protein powder brand, paying for sponsored posts and these supplements or bodybuilding subreddits.

00:35:41:00 – 00:35:47:06
Shawn O’Malley
I just think there’s considerable room here to earn more advertising dollars per user.

00:35:47:08 – 00:36:18:07
Daniel Mahncke
Looking at those numbers, it certainly looks like that there’s just so much potential left for users to be monetized that the main question will be, can Reddit monetize those users as well as Facebook does? Or will it be more like Snapchat with having continuous problems with monetizing the users and then effective way? I’ve mentioned before that most of my interactions with Reddit were based on Google searches, and that is a development that seems to concern many investors.

00:36:18:09 – 00:36:28:18
Daniel Mahncke
Do you think that it has become too dependent on Google search, and that it has in some ways inflated Reddit’s user numbers?

00:36:28:19 – 00:37:01:04
Shawn O’Malley
It’s a great question and a timely one, because it is one of the big things on Reddit investors minds these days. The elephant in the room here is that more than half of Reddit’s visitors come from search engines. Specifically, Google. And Google has increasingly been driving search traffic to Reddit for answers for very specific types of questions. But if Google were to ever change its mind and see Reddit as maybe a risk to its business in some way, that would just ring a lot of alarm bells for Reddit’s business.

00:37:01:06 – 00:37:28:12
Shawn O’Malley
So Reddit is actually the sixth most searched term on Google, so people are intentionally googling things with Reddit in the query so that they’re directed to relevant Reddit threads. And I think that’s in large part due to people oftentimes trusting the answers they get on Reddit more than Google. So they want to use Google to help them find relevant threads, and then go into Reddit to actually get the answer, as opposed to reading some article on Google.

00:37:28:14 – 00:37:53:18
Shawn O’Malley
And if you look at the search data on Reddit over the last five years, it’s a pretty steady line up. And so the right Reddit CEO has described it as a symbiotic relationship where Reddit and Google Co depend on each other in a way, as she puts it right, it is this trove of human intelligence providing some of the best answers for questions anywhere on the internet and for Google.

00:37:53:22 – 00:38:16:15
Shawn O’Malley
As an engine designed to help people find answers, it’s only natural that its search engine should drive people to Reddit at some point, though, if they don’t already. I think Google will have to see Reddit as a competitor, because Reddit is developing its own AI powered search engine called Reddit answers that can replace how people use Google to find answers on Reddit.

00:38:16:17 – 00:38:50:21
Shawn O’Malley
I’d also imagine, from Google’s perspective, that searches, ending and Reddit aren’t as easy to monetize as searches for other specific questions. Reddit Answers is sort of like ChatGPT, and it pulls from Reddit, specifically in links to related posts from Reddit, which is an interesting way to use an LM. I hadn’t even realized it before, but I am one of these people who often does a Google search and then types in Reddit at the end, because I actually just want Google to help me find the most relevant posts on Reddit, and I sort of started doing it subconsciously, I guess, as I noticed a Google was helpful for searching through Reddit.

00:38:50:21 – 00:39:25:20
Shawn O’Malley
And I know that’s something Reddit wants to fix because it’s not a good look for them. Reddit Answers is the first meaningful swing at correcting this issue, where Google is better at searching through Reddit’s corpus of user interactions and posts than Reddit is at searching through itself. And I’m not sold on it because for the sake of convenience, I think I still probably would find it faster and easier to just add Reddit to the end of my searches and my search bar, but maybe there’s something I’m missing, and maybe they have a bigger vision than what I’m describing.

00:39:25:22 – 00:39:44:06
Shawn O’Malley
But at least within this context, it kind of seems like a solution to a problem that doesn’t really exist. Because I don’t think Reddit answers is that much of an upgrade over just adding Reddit to the end of a Google search, but at the same time, it would be a really bad luck for Reddit if Google continued to be better at searching through Reddit than they are.

00:39:44:08 – 00:40:04:12
Daniel Mahncke
You know, today’s episode is not about Google, but I just wanted to make a point because I think it’s fascinating that both Reddit and ChatGPT seem to take market share from Google, although the business is technically a different one. But it does say a lot about how the mode of Google is attacked, and I wasn’t aware of the part Reddit place here.

00:40:04:12 – 00:40:34:12
Daniel Mahncke
So now at the time of this recording, what it is actually and a pretty significant correction, it has lost 20% today, 32% in the past week, and over 50% from its all time high in the first week of February. So you might want to tell me and the audience what all of this is about. Is it just the natural correction of a stock that quadrupled within a year, or is it something more significant that’s going on.

00:40:34:14 – 00:40:52:17
Shawn O’Malley
Given the way Reddit stock has run up over the last year, I can’t say I’m too surprised. There’s been a pullback after it reported its Q4 earnings. The day after they reported the results. I think the stock pulled back by 15%. And that’s just what happens when you’re priced for perfection. I pulled up the stock. Try to get now.

00:40:52:17 – 00:41:19:16
Shawn O’Malley
And like I said at the time of recording it sound over 45%. Over the last month or so, the valuation has just become much, much more reasonable than it would have otherwise been if we had done this episode a few weeks ago. But looking at the quarterly results, I mean, they had a very solid 101.7 million average daily users during the last three months of 2024, but that was maybe a million short of what analysts had expected.

00:41:19:18 – 00:41:40:10
Shawn O’Malley
So that was a little bit of a negative surprise, even though net income tripled from the year before and revenue was up 71% year over year. And as we just talked about a minute ago, Reddit relies heavily on Google search. And due to some changes in Google’s algorithm, Reddit reported a lot of volatility in traffic. And I know for a fact that freaked investors out.

00:41:40:12 – 00:42:16:02
Shawn O’Malley
Steve Huffman, though, tried to address that in a letter to shareholders. And he says, quote, what happened wasn’t unusual. Referrals from search fluctuate from time to time, and they primarily affect logged out users. Our teams have navigated numerous algorithm updates and did an excellent job adapting to these latest changes effectively. So that’s how the CEO sees it. Until Reddit can figure out how to convert large chunks of what they call logged out users, who are these people who might visit from Google for a single answer, and then leave the platform into bona fide Reddit users with their own accounts?

00:42:16:04 – 00:42:39:18
Shawn O’Malley
The company is likely going to remain at the whim of changes to Google’s search algorithm. And basically, for context, there are two types of Reddit users. You could say those who visit Reddit for answers to specific questions, usually from Google searches and those who scroll. Reddit. Reddit scholars probably have the app and they simply enjoy the platform, whereas the logged out users are coming from Google.

00:42:39:18 – 00:43:04:04
Shawn O’Malley
They’re sort of like tourists who are passing through, but haven’t been attracted enough to the platform to create an account and download the app for whatever reason. And obviously these visits are not equally valuable, but I do think increasing their conversion rate of these tourists to scholars is a core strategic focus for the company. So it’s worth emphasizing that Reddit does stand on its own to an extent.

00:43:04:04 – 00:43:23:16
Shawn O’Malley
It’s not entirely dependent on Google, but I think they’ll be probably the first to say they’ve enjoyed a tailwind from Google, which is maybe one way to put it. And just to step back, there was honestly a lot to love about this past quarter in 2024 as a whole, the business is really taking off, accelerating as we’ve kind of talked about.

00:43:23:16 – 00:43:44:18
Shawn O’Malley
It’s churning on all metrics, right? It became profitable for the first time ever last year, with advertising revenues up 50% from 2023 and a positive swing of operating cash flow to the tune of nearly $300 million. So the first quarter of this year won’t generate the same revenue numbers as the last quarter, because advertisers always spend much more around the holidays.

00:43:44:18 – 00:44:11:01
Shawn O’Malley
But as I said, everything is moving in the right direction for Reddit to become a juggernaut on social media in terms of the size of their user base and profitability. What I really like about Reddit is that as we’ve kind of covered a bit, is it’s organized by topic pretty much every other platform, from acts to Facebook, Instagram, TikTok or all premised around following specific people, whereas Reddit isn’t like that at all.

00:44:11:03 – 00:44:34:07
Shawn O’Malley
I don’t follow anyone on Reddit. Rather I engage with a number of subreddits, focus on topics I find interesting, and that structure is just what makes Reddit unique, and that uniqueness has some value. As the internet becomes increasingly consolidated, people visit fewer and fewer websites and instead spend their time in a few different ecosystems, like social media platforms or YouTube.

00:44:34:09 – 00:44:59:11
Shawn O’Malley
There are a lot of people out there who exclusively go back and forth between Reddit, YouTube and Instagram, and that’s it. That’s all they do. They don’t really frequently visit any other types of websites, anything of the day. They’re all competing for your attention. But my point, I guess, is that Reddit is differentiated enough that it’s not nearly as close of a substitute for any other platform as, say, Instagram is for TikTok.

00:44:59:13 – 00:45:21:13
Daniel Mahncke
As a long term user of Twitter, I couldn’t agree more on the culture change and it definitely was not to the better. So I can’t really comment on whether it’s culture since I spend too little time on the platform to do that, but I find it very refreshing to see focus on topics rather than people. I think both is needed and also demanded.

00:45:21:15 – 00:45:40:07
Daniel Mahncke
But while following people has an oversupply of platforms, Reddit seems to be the only big player who’s focused on topics, but turning from a user perspective to an investor’s perspective, what other ways than the ones we mentioned before do you see for future growth?

00:45:40:09 – 00:46:03:01
Shawn O’Malley
One interesting idea for how Reddit could grow its business, which, funny enough, I found on a thread about the company’s earnings, is this idea of monetizing commerce within subreddits. So, for instance, there’s a popular community called Watch Exchange, but people have to leave the app to settle transactions on Venmo or PayPal, which is already just kind of a shady process.

00:46:03:03 – 00:46:25:23
Shawn O’Malley
If Reddit could create a marketplace functionality for these transactions in charge payment processing fees, that could be a really powerful way for them to make Reddit and even more self-sustaining ecosystem that you never have to leave, and also generates more cash for the company. And in an AMA on Reddit’s investor relations subreddit, Sif, Huffman answered the exact question.

00:46:26:01 – 00:46:44:21
Shawn O’Malley
He alluded to the fact that this is why they’ve allowed users to access the company’s developer platform so they can contribute to building out these types of features from within their communities. But it also doesn’t sound like this is going to happen anytime soon. But again, it’s just kind of an idea of things in the bigger picture that they could do to improve the business of Reddit.

00:46:44:21 – 00:47:09:13
Shawn O’Malley
And for contacts with the Reddit developer platform, anyone can sign up to build the future of Reddit, as they call it, with powerful tools for their communities. And this can include everything from having live sports scores to community games, daily threads around livestock, price data really anything you can envision for working across platforms and scaling apps incorporated on Reddit servers and added into these subreddit communities.

00:47:09:19 – 00:47:40:16
Shawn O’Malley
My impression is that they’re focused on improving advertising first and foremost, and then on improving Reddit answers, which again, is the Reddit search engine that will allow people to find answers on Reddit instead of having to go through Google and way below that on the list of priorities is probably making Reddit this all in one marketplace platform. He did say, though, that they’re working on enabling paid subreddits where you could create paywalled content within Reddit, so it does sound like it’s on the way.

00:47:40:16 – 00:48:12:14
Shawn O’Malley
Within the next year or so. There is a lot of what you might call adult content on Reddit, and I’d guess that a lot of this is used as a funnel to direct people off Reddit to platforms like only fans, where these mature content creators can charge subscriptions and monetize their following. And I’m sure Reddit is keen to keep that activity on their platform by pulling users back from OnlyFans, which is built a massive multi-billion dollar business in the past two years.

00:48:12:18 – 00:48:31:23
Shawn O’Malley
So this is your doesn’t only extend to adult content, of course, but this is one of the main areas where people often talk about Reddit losing out on a good deal of potential monetization. The tricky thing is finding a balance between hosting this kind of content privately, while also trying to run a large advertising business on the rest of Reddit’s content.

00:48:32:01 – 00:48:53:21
Shawn O’Malley
And I’ll add that another way Reddit could grow the business on sort of a different node is through further data licensing. Beyond what we’ve already discussed with large language models, Reddit is often described as a hive mind, and if you can harvest that data at scale, you can get some very powerful real time insights into the collective intelligence that is the internet.

00:48:53:21 – 00:49:21:10
Shawn O’Malley
And as a result, there have been some studies that suggest that Reddit comments can be good indicators of sentiment around stocks, which I’m sure you might imagine is of interest to a bunch of hedge funds and stock traders. And as a result, Reddit recently announced that they’re tapping into this demand for real time data on what people across Reddit think about certain companies by partnering with Intercontinental Exchange to sell data captured from posts on financial subreddits like the infamous Wall Street bets.

00:49:21:12 – 00:49:45:14
Shawn O’Malley
And I suspect they could do something similar for a variety of different companies that want insights into what a large body of internet users think about a given topic, whether for marketing or branding purposes, stock trading, product development, or anything else. Some people have historically made their own scraping tools that extract data from Reddit, which is a real kind of point of sensitivity for them.

00:49:45:16 – 00:50:05:01
Shawn O’Malley
But the company is clearly trying to crack down on that. They refer to this as their API defense initiative, and the hope is to deter this kind of scraping activity and block it before much data can be extracted. And it’s hard to say how well this works. I’m not really technically minded enough to know whether they’re doing a good job at it.

00:50:05:03 – 00:50:19:18
Shawn O’Malley
Legally. Reddit owns all of the user data, and big parties like alphabet are clearly inclined to pay for it. Legally, though I’m sure there are plenty of entities operating on smaller scales that have found ways to legally scrape Reddit.

00:50:19:20 – 00:50:46:23
Daniel Mahncke
When you say all that, it only seems like Reddit has so much more potential than Snapchat had at any point. I mean, there’s only one marketplace, although it’s far into the future, thinking it has so much potential for many, many opportunities to make more revenues and also profits. Now getting back to the here now, you mentioned before that Reddit is still a pretty US center with a wealth 40% of active users coming from the states.

00:50:47:01 – 00:51:12:05
Daniel Mahncke
And to change that, they now started translating content with the help of AI. I’m always a bit skeptical of AI features like that, and I’m even more so on Reddit, where a lot of communities, as you mentioned, have their own jargon and terminology. So how well do you think the translation service is doing and could it actually help expanding internationally?

00:51:12:07 – 00:51:35:18
Shawn O’Malley
I think that all comes in the spirit of making Reddit a more accessible platform, and then monetizing the body of answers and insights that they’ve accumulated. There. As we keep talking about, they’ve been using AI to make Reddit fully translatable into a few select languages for native speakers of those languages, and they started with French, but are now starting to expand into, I think, a half dozen other languages.

00:51:35:18 – 00:52:16:22
Shawn O’Malley
So it does come with substantial computing costs, but I guess those will come down over time and ultimately should help with the goal of making Reddit into a more global platform. As you know who someone who speaks English as a second language, the internet is generally dominated by English, and Reddit is no different. But if you buy into the idea that Reddit is this unique corpus of human intellect and wisdom, then of course, allowing more users to access this hivemind by making language less of an obstacle is objectively a good thing and probably a compelling growth engine for the underlying business.

00:52:17:00 – 00:52:57:17
Shawn O’Malley
So to kind of make the point, you could imagine a subreddit in Spanish that’s devoted to topics and maybe some of the best tapas recipes in the world exists only on that subreddit, and I would have no idea because I’m searching for recipes in English on Reddit for topics. And just by making every subreddit language agnostic with these machine translations, I could stumble across a translated version of those threads in recipes and they might become available to me in a way they otherwise never would have been, revealing a whole new world of authentic cooking tips for me to tap into.

00:52:57:19 – 00:53:25:21
Shawn O’Malley
And the other benefit of automatic translations, more pragmatically, is that they might be able to make more of the platform attractive to advertisers by increasing the reach of ads and subreddit targeting, regardless of language, and that will hopefully attract a more global base of advertisers. Bidding on Reddit’s ad inventory. So that said, Reddit, as you pointed out, remains chiefly a U.S. platform with more than 40% of its traffic coming from the US.

00:53:25:23 – 00:53:57:18
Shawn O’Malley
And then the United Kingdom and India are the second largest users of Reddit, with both having around 5% share of Reddit’s global traffic. And then there’s Canada and Australia and Germany and France and Brazil and a bunch of countries with slightly smaller shares. On the bright side, I guess you could kind of invert that statistic to say less than 50% of Reddit’s users are concentrated in the US, which is a high concentration and shows that Reddit is not as much of a global platform as some other social media giants.

00:53:57:20 – 00:54:02:19
Shawn O’Malley
It does also indicate there’s a lot of room for progress to grow internationally.

00:54:02:21 – 00:54:26:04
Daniel Mahncke
And I could imagine that’s potential that it will definitely sell out over time. As someone coming from Germany, while English proficiency is pretty high, people do like to watch and consume content in their native language, and I would assume that’s the case in almost any country. So translating services is probably something that helps a lot with getting more international.

00:54:26:06 – 00:54:37:00
Daniel Mahncke
But besides reducing language barriers, what else could Reddit do to expand globally and also appeal to audiences outside of the US.

00:54:37:02 – 00:55:05:01
Shawn O’Malley
For growth for Reddit in new areas can be tricky. I’ll be the first to say that you’re trying to spread communities, and that has to be authentic, so you can’t spend your way to growth. A lot of what Reddit does to enable growth stems from orchestrating these community meetups, training moderators on how to manage and grow their communities, and directly reaching out to people who might be positioned to build a community to encourage them to do so.

00:55:05:03 – 00:55:30:00
Shawn O’Malley
I think Reddit CEO has used the expression high touch, and it’s probably a good way to put it. They’re trying to do things behind the scenes from a very high level, to enable Reddit to spread organically, as opposed to running massive ad campaigns for Reddit. So the company has and will continue to primarily grow via word of mouth, which has its pros and cons.

00:55:30:02 – 00:55:52:23
Shawn O’Malley
The wonderful thing about Reddit, though, is that truly, anyone can fit in there and find a place to belong. Whatever you’re interested in or need help with, there’s probably a community that already exists and in the places that Reddit has intentionally focused on trying to grow adoption, they’ve had some really great success, which just me as a potential investor, a lot of optimism.

00:55:53:00 – 00:56:04:08
Shawn O’Malley
France has been a major point of focus alongside India and the Philippines. And in those three markets, user growth is up by more than 50%. So that’s just very promising to me.

00:56:04:10 – 00:56:30:23
Daniel Mahncke
So that proves the point that people do like to consume content in their native language. Now, you mentioned the CEO Steve Hoffman, quite a lot. And his journey is, I would say, a bit out of the ordinary for a founder, but he still was the one leading the company through all the challenging times that any company faces when it starts off as an idea and turns into a multi-billion dollar company.

00:56:31:01 – 00:56:47:12
Daniel Mahncke
So he clearly seems to have a wide skillset and also a deep personal connection to the company. And as a long term user and also former investor, what do you think about him and do you think he’s the right person to go forward with?

00:56:47:14 – 00:57:21:16
Shawn O’Malley
Steve Hoffman is co-founder and CEO. Right. And from the start, that’s a combo I typically like in a company. If anyone is going to care about a business and understand everything about it, it’s of course the founder. And when they’ve been tied to the company across two decades, that’s assigned to me that they aren’t just some visionary, but they actually have the managerial and practical business building skills to scale a company from startup to growth to maturity, which maybe isn’t that yet, but it will be.

00:57:21:18 – 00:57:49:20
Shawn O’Malley
And that requires a rare combination of skills. And you could probably say Hoffman does seem to have them. His story begins in his senior year of college at the University of Virginia, when he drove to Boston to attend a lecture from legendary venture capitalist Paul Graham, and after meeting at the event, Graham invited Hoffman to apply to his startup incubator, Y Combinator, which is a very famous organization and the venture capital world.

00:57:49:22 – 00:58:13:00
Shawn O’Malley
And the idea was for a company called My Mobile Menu, which he hopes would allow users to order food via text message. It was actually an early idea for DoorDash, funnily enough, but it was rejected, and in a later brainstorming session, Graham Hoffman and Hoffman’s roommate Alexis Ohanian had the idea for building what they call the front page of the internet.

00:58:13:02 – 00:58:34:05
Shawn O’Malley
Hoffman then kind of went out on a whim and programed the website, and launched Reddit in June 2005, with funding from Y Combinator to help bring it to fruition. In just a few months, the site’s web traffic skyrocketed, and Hoffman or Hanin realized that they’re rich, and they promptly sell out of the company for something like between 10 and $20 million.

00:58:34:07 – 00:59:10:14
Shawn O’Malley
And Hoffman goes on this backpacking trip across Costa Rica and just takes time away from Reddit and forms a new travel website called Hit Munk, which was this focus for a few years. But by 2014, though, Hoffman has a lot of regret, he realizes that selling Reddit has been a mistake given how wildly its growth exceeded expectations. And by 2015, Reddit had rehired Hoffman as CEO, and in the last decade that he’s been CEO again, and he’s accomplished a lot and really improved the underlying infrastructure behind Reddit.

00:59:10:16 – 00:59:21:08
Shawn O’Malley
He’s just made it a lot more usable, both in web and app form, and that doesn’t come without significant cost. His compensation package in 2023 alone was nearly $200 million.

00:59:21:10 – 00:59:42:23
Daniel Mahncke
Wow. I mean, I would like to make that much money, but you just sneaked in another name. Alexis Ohanian, who is the co-founder and has resigned in 2020, and the reasoning just seemed a bit off to me. So could you shed some light on that situation? Although it’s already a couple of years ago.

00:59:43:01 – 01:00:31:22
Shawn O’Malley
Right, right. So Rohatyn officially resigned in June 2020 during a pretty tense period with Covid lockdowns and Black Lives Matter protests in full effect and this is a time of protests and denouncing the wrongs of the world. And as such, We’re Hunting requested that his director position be replaced by an African-American and that came after Reddit’s former CEO Elon Powell, from before Hoffman took over again in 2015, had accused the company of long tolerating racism and implicitly condoning it by not regulating speech more closely on the platform, which prompted her to say that the platform, quote, monetizes white supremacy, which is a bigger allegation, and I’m sure we all remember what that moment in history

01:00:31:22 – 01:00:53:12
Shawn O’Malley
was like in five years later. I don’t think we found any societal clarity on what type of speech should and shouldn’t be regulated online, and whether that is at odds with the spirit of the First Amendment, at least in the US. But I don’t think anyone seriously associates Reddit with white supremacy any more than the broader internet is associated with white supremacy.

01:00:53:14 – 01:01:23:15
Shawn O’Malley
And honestly, Reddit probably relies on inflammatory political content to drive engagement far less than other platforms like X and Facebook. But I’m just saying that of my own gut feeling. I don’t have any data to prove that. I also don’t really think or Hanin was that closely involved with Reddit anymore anyways. And so there is a pessimistic side of me that thinks that this was maybe just a clean way for him to exit the company and focus on other things.

01:01:23:20 – 01:01:49:15
Daniel Mahncke
Reddit would also not strike me as the most political platform. Talk about the likes of Facebook or especially Twitter and we’ve compared them Twitter, Reddit, Facebook quite a lot today already. But if you would have to boil it down to just one thing where you would say Reddit and X and Facebook differentiate the most, what would that one thing be?

01:01:49:17 – 01:02:16:12
Shawn O’Malley
The biggest difference is that the platform is synonymous, which in a way, counterintuitively, actually frees people to be themselves. Reddit on purpose drives you know as little as possible about its users, even their names. It’s a very, very different model from Facebook, as we all know, and that has implications for advertising visibility on Reddit. Besides, advertising has to be completely earned.

01:02:16:14 – 01:02:44:14
Shawn O’Malley
We talked about a little bit earlier, but every post can be uploaded or downloaded, and as posts get more of votes, they get more visibility. So it’s a system of earn promotion, you might say, not one where the largest influencers immediately get boosted by the algorithm as soon as they click posts. Not to say that Reddit doesn’t have any algorithms at all, but my point is that it’s more merit based than other platforms, where every post from the start is sort of on a level footing.

01:02:44:16 – 01:03:19:19
Shawn O’Malley
Reddit in static sells with contextual advertising based on topic interests in keyword, as opposed to having user level data such as where someone lives, what they do for work, and whether they’re married or not or whatever it is. According to Reddit itself, 40% of internet users consider Reddit recommendations as the most influential factor in their purchasing decisions, which, if that’s even partially true, is incredibly powerful and telling of the company’s earnings power.

01:03:19:21 – 01:03:48:11
Shawn O’Malley
And in a study conducted by TransUnion, Reddit ads returned over $20 in incremental returns on ad spend for every dollar invested on the platform. So unlike Facebook or ads for this kind of one main feed based on followers, when you post on Reddit, you must choose a specific subreddit to post to. So small businesses love to advertise on Facebook because they can target precise locations with their ads.

01:03:48:13 – 01:04:12:21
Shawn O’Malley
Maybe your local bakery wants to run ads only for people who live in your town, and with Facebook, that’s completely possible. And honestly, the data can get much more granular than that. But we’ll leave it there with Reddit, these types of businesses aren’t running ads in the same ways your local baker or Hvac business does not want to advertise on Reddit, because there’s no good way to geo target an audience with enough precision.

01:04:13:03 – 01:04:52:22
Shawn O’Malley
They don’t want to pay for impressions seen by people who live five counties over or live in another state if they only operate in one specific area. That necessarily means that advertisers on Reddit need to have at least some degree of regional or nationwide scale for it to make sense. On Reddit, the advertising opportunities are probably more like a large sporting goods brand targeting a hiking subreddit to promote new types of camping equipment to a passionate audience of outdoorsmen who may or may not, in that exact moment, be having a conversation about their preferred tents on Facebook, you may be able to target the right person with a lot of precision, but you might not

01:04:52:22 – 01:05:19:20
Shawn O’Malley
be targeting them at a time when they’re primed to see your content. A makeup brand might want to target Sally from Minnesota for a new product release, but if Sally is engaged in a heated political debate, she’s not exactly going to be receptive to the makeup ads that she’s getting at that moment. So, as I’ve said, what is powerful about Reddit is that you can target groups of people who have self-identified by interests and niche and show them ads when visiting a certain subreddit.

01:05:20:00 – 01:05:46:05
Shawn O’Malley
So, you know, they’re trying to engage with your advertisement if it’s relevant. And that sort of comes at the cost of really specific user level data. But for example, if your ads for football jerseys or sports streaming packages are very effective when delivered to folks viewing various sporting subreddits. For the record, though, I do continue to think that meta is a considerably more attractive advertising destination for most businesses.

01:05:46:06 – 01:06:23:13
Shawn O’Malley
I definitely see why Reddit can be compelling to certain types of companies, and especially, at least comparatively, has been undermined monetized given some of the uniqueness of the advertising opportunities it can offer. And on that point, just as a user, I’ve certainly noticed more ads on Reddit, generally in more ads from sizable corporations, and I don’t find them to be as intrusive as on other platforms, probably in part because they’re so relevant to this subreddit I’m engaging with, whether that’s Fidelity or Robinhood ads, an investing subreddit, or ozempic ads and a dieting subreddit.

01:06:23:15 – 01:06:52:03
Daniel Mahncke
And in theory, this sounds absolutely great. When I’m scrolling through Instagram, for example, I just don’t feel like buying anything. But when I’m actively looking for something and then come across an ad on Reddit, I’ll be much more likely to buy. That said, I have to admit I haven’t yet seen any ads on whether that sounds like a perfect fit for the topic, and sometimes they blend in so well that I don’t even see them.

01:06:52:05 – 01:07:15:01
Daniel Mahncke
And that makes me wonder whether other users have the same experience. Although you say you have an experience of very targeted ads, and they also fit well into the topic or the subway that you’re visiting. So maybe that’s just me. I guess we just have to see long term how this model works out and whether they can profit on it as great as Facebook is.

01:07:15:03 – 01:07:34:23
Daniel Mahncke
Although as you said, there’s still a lot of difference and also a lot of differences and earnings potential, that’s just all part of the future. That uncertainty definitely doesn’t make your job of coming up with a valuation forwarded any easier. So I’m curious, what did you come up with?

01:07:35:00 – 01:08:04:12
Shawn O’Malley
Reddit is going to be tricky to value because generally last, mature businesses have much wider margins of error in their valuations compared to a company like Hershey. The range of possible outcomes is just much, much wider with Reddit, and as a result, it’s easy to be overly pessimistic or overly optimistic when estimating intrinsic value. For example, what might Reddit be worth if its user base doubles in the next five years?

01:08:04:12 – 01:08:29:02
Shawn O’Malley
While its advertising revenue per user tends closer towards Facebook’s? I don’t even have to do the valuation. I could tell you immediately. Reddit would be worth considerably more in that scenario than however it’s valued today. And then I might want to imagine, okay, what if the business if he doesn’t grow as fast internationally as hoped? While advertising does continue to improve dramatically, what would it be worth in that situation?

01:08:29:04 – 01:08:58:07
Shawn O’Malley
And what if international growth is slow for some reason, and Reddit proves unable to scale its advertising like other social media platforms, probably due to them not having much user level data. In that case, the company would be worth a lot less. So it’s a very simple way to think about it and not claiming to be doing rocket science here, but I kind of try to take where the company is at in this moment, and then set my ceilings and floor is where the business can be in five years and just go from there again.

01:08:58:07 – 01:09:10:17
Shawn O’Malley
I’ll be the first to say that with a fast growing company like Reddit, which is just now inflecting toward profitability, two investors can look at it with the same information and come to wildly different conclusions about what the business is worth.

01:09:10:19 – 01:09:36:18
Daniel Mahncke
Usually, I would say I’m not a fan of comparable valuation, but I look at the price of Snapchat and they are valued at about $15 billion, and it’s known as a chronically unprofitable business. Reddit is now about $3 billion more expensive, but there’s lots of potential. So I would like to think if Snapchat might be a worst case scenario.

01:09:36:20 – 01:09:57:00
Daniel Mahncke
There’s only a downside of $3 billion. And don’t get me wrong, this is a very, very simple math, and I’m not suggesting this is how you should go about valuing, but it does show that Reddit doesn’t seem to be too expensive. Still, we want the intrinsic value, so. So we dig into the numbers a bit.

01:09:57:02 – 01:10:19:02
Shawn O’Malley
Yes, I’ve got the disclaimers out of the way, and I like the point you make with Snapchat. It’s a helpful way to think through the frameworks of what a worst case scenario could look like for Reddit. And I do have to say, my thinking has shifted a lot since I first participated in the IPO in 2024, when I probably thought Reddit was going to be more like a Snapchat.

01:10:19:04 – 01:10:39:08
Shawn O’Malley
I was biased by my perception that there was just no way Reddit could be a good business without the kind of data on individuals like Facebook has. And at that time, I almost never saw ads on Reddit. So I saw Reddit as this platform, and I got a lot of value from. But I couldn’t figure out how they made enough money to stay in business.

01:10:39:10 – 01:11:08:15
Shawn O’Malley
In just the last year, the functionality and usability of Reddit have improved substantially. Videos load faster, the layout is more intuitive. It’s easier than ever to find communities that align with your interest and all around. Because of that and more, Reddit feels more mature than it used to. For my valuation, I wanted to focus on the value of Reddit’s user base, and for that we need to look at the average revenue per user, aka our payroll.

01:11:08:17 – 01:11:39:03
Shawn O’Malley
And here, one of the first things you’ll notice when digging into Reddit’s financial filings is that there is a considerable discrepancy between how valuable users in the US are compared to users. Internationally, international users make it more than half the user base if they only contribute to approximately 20% of the revenues. So there’s a vast disparity in the revenues per user earned on international users relative to US ones, and the average revenue per American is something like five times higher.

01:11:39:05 – 01:12:09:16
Shawn O’Malley
And that just can’t sustain forever. As one of the wealthiest countries in the world, naturally, Rpu in the US will remain very high comparatively. But that gap should narrow as Reddit focuses more on appealing to international advertisers. I suspect global advertisers will be increasingly attracted to Reddit as the company grows overseas, improves advertising technology generally, and then uses AI to make Reddit translatable into any language.

01:12:09:18 – 01:12:37:06
Shawn O’Malley
So the tricky thing with this valuation is not only trying to anticipate how the user base might grow in the next few years, but also decomposing global rpu projections to figure out what is a realistic balance between revenues per user. In the US and abroad. If you think international rpu can double, then that dramatically changes estimates for Reddit’s average global rpu and the total revenue it can earn off its entire user base, basically since 2022.

01:12:37:06 – 01:13:02:01
Shawn O’Malley
For context, total user growth is up by over 20% per year, and the US is actually not as mature of a market as you might think. It grew as fast as international markets over that period, but in that time, the Rpu spread between the US and other countries narrowed a bit because international rpas grew twice as fast as domestic rpas in the last few years.

01:13:02:03 – 01:13:23:16
Shawn O’Malley
There’s kind of a word salad, but I feel like with every user based platform I’ve looked at, whether it’s Spotify, Kupang or now Reddit, there’s a lot of optimism baked in that international users will one day be worth as much as the company’s core base of users in some developed country, whether that be Korea, Sweden or, in Reddit’s case, the US.

01:13:23:18 – 01:13:52:00
Shawn O’Malley
But that can be a fraught assumption. Some places like Australia in the UK, I’m sure could probably come closer to matching the US’s rpu, given the median incomes there. But they’re small markets, and bigger markets like Brazil and India are, first of all, much further off from embracing Reddit culturally. And then secondly, are just much further off from generating the same amount of ad revenue per user because of discrepancies in purchasing power parity and incomes in those countries.

01:13:52:02 – 01:14:20:05
Daniel Mahncke
And it’s also about the time horizon. So if you want to go out 30 years, you could imagine India becoming a huge and important market. But if we’re going for five years, you would need to focus on Europe and how Reddit is spreading there, right? I remember valuing Netflix and all the assumptions I had to come up with for the different reviews, depending on the regions, and how much they will likely spend in 5 or 10 years.

01:14:20:07 – 01:14:50:03
Daniel Mahncke
And I always struggle with a confident assessment in those cases, since they can make or break your investment thesis. And I prefer setups where the more uncertain assumptions have a rather small impact on the investment outcome, and that’s why I want to ask you, how did you get comfortable with making these assumptions? Even more so, considering that Reddit is still a young company with not much data available yet.

01:14:50:05 – 01:15:25:02
Shawn O’Malley
I wouldn’t say I’m hugely confident in the assumptions I made, but to jump straight to it, I got a valuation of roughly between $120 and $135 per share as an intrinsic value target for Reddit, and at that price, there are some big assumptions that not everybody will agree with. That estimate anticipates Reddit’s growth continuing to accelerate internationally, while rpu, both domestically and internationally, continue to appreciate as Reddit improves its ability to serve ads and attracts more advertisers.

01:15:25:04 – 01:15:56:08
Shawn O’Malley
So while more users and higher revenue per user are boosting the top line, I also try to model how Reddit may benefit from economies of scale over the next five years, since that their operating margin might rise from 12% last quarter to as high as 30% by 2029. And that basically just means overhead, costs, R&D, marketing, stuff like that don’t scale as fast as revenue and become smaller costs as a percent of sales over time.

01:15:56:14 – 01:16:31:01
Shawn O’Malley
So so your margins can increase and on that point, very impressively, last quarter, Reddit grew revenue 3.5 times faster than total costs, which I don’t think that’s sustainable. But that is an incredible rate of achievement. And there are economies of scale which makes up for many, many years of poor business results, at least in part. A 30% operating margin by 2029, though, is is aggressive and it would mean, at least in percentage terms.

01:16:31:05 – 01:16:53:01
Shawn O’Malley
Reddit is close to being in line with Alphabet’s profitability, but is still a bit of a ways off from being as profitable as meta, and I see that just to indicate that this thesis banks on Reddit being able to achieve a degree of profitability that is in line with some of the other big tech companies that we all know.

01:16:53:06 – 01:17:13:14
Shawn O’Malley
And if anyone were to look at my model and say it’s way too optimistic, I would not blame you at all. It is optimistic. But I’m also optimistic about Reddit and the way I offset some of that is by trying to add in a 15% margin of safety to further lower my price target, and also by using a weighted range of values for possible exit multiples.

01:17:13:14 – 01:17:38:13
Shawn O’Malley
After five years that basically account for a bunch of different growth trajectories, the company could go on down the line and sentiment around the stock. So if you want to see a model, you can sign up for our Intrinsic Value newsletter in the show notes or at the Investors podcast.com/newsletters. And there you can download the model for free and use it and make your own assumptions.

01:17:38:15 – 01:18:05:18
Shawn O’Malley
So with that tangent, the long and short of it is that even after some arguably very generous assumptions and then some efforts to maybe hedge that a bit, I found the stock to be about fairly valued, though it keeps slipping the way that it has in the last month. It could get very interesting very soon. And on that point, if we get some prices below $100 per share, which I would not be surprised that at all.

01:18:05:18 – 01:18:29:13
Shawn O’Malley
With Reddit, maybe by the time you’re listening to it, that’s already happened. I could be keen to snatch up shares at that price. Reddit’s average revenue per user is like a third of Meta’s rpu, and even with some bold growth assumptions, Reddit can improve its business a lot. While still not being nearly the same quality as meta, which of course has much more data on users and much wider scale.

01:18:29:13 – 01:19:01:19
Shawn O’Malley
But still, Reddit’s management has said that they’re probably only in the third or fourth inning of revamping their advertising services, which should only make the platform more appealing to advertisers. We’ll have more and more tools at their disposal to reach Redditors, and specifically whatever types of Redditors are relevant to their products and services. But between share dilution, Google search algorithm changes, inefficient management of the business, economic slowdowns that reduce ad spending, and a dozen other things.

01:19:01:21 – 01:19:12:03
Shawn O’Malley
There’s also a lot that can go wrong here, too, so I really haven’t sold you on Reddit, Daniel, but, I’ll be curious to hear how you think about the company and how to value it.

01:19:12:05 – 01:19:36:19
Daniel Mahncke
I wouldn’t say so. I think in the last weeks, and especially over the course of this episode, I feel like I have a totally different and a much better understanding of the company Reddit now, and also the platform. And I went from seeing a company that seems to be walking in the footsteps of Snapchat to one that could potentially be another social media success story.

01:19:36:21 – 01:20:02:06
Daniel Mahncke
Having said that, though, I think there are people with a lot more confidence and maybe you’re one of them who are willing to bet on that success by paying higher prices than I would feel comfortable with. The stock did come down a lot recently, and it didn’t yet reached bargain level prices for me. But we are close to $100, and I think that’s a level where you could seriously think about adding it to the portfolio.

01:20:02:08 – 01:20:30:05
Daniel Mahncke
And I say bargain levels, because that’s what it takes for me to buy a company that just reported its first profits and doesn’t yet have a proven business model, and we might be five years out of knowing if this business model is actually sustainable. So at a price of about $100, I think it would be a lot more attractive and could actually become an investing opportunity, which is something that I wouldn’t have thought going into this episode.

01:20:30:06 – 01:20:48:04
Shawn O’Malley
I like the way you put it, and I’m glad that we’ve done the legwork to understand Reddit, because this is a company that, as we keep saying, could be really exciting if things continue to go their way, which is a big assumption. And I have some pause because this business was unprofitable for 20 years until just recently turning profitable.

01:20:48:06 – 01:21:10:18
Shawn O’Malley
So make of that what you will. Management has done a nice job growing the platform, but it seems like they only recently have gotten serious about the business behind Reddit. And while the early signs are very promising, I also don’t want to overestimate their ability a just a few good quarters. While it took them so long to get to a position of success relative to what other platforms were able to achieve.

01:21:10:19 – 01:21:35:06
Shawn O’Malley
Spotify also recently became profitable, and it’s kind of an interesting comparison, but they’re also a few years younger, too. So the worst case scenario that you’ve touched on is that instead of becoming more like meta with Facebook or Instagram, they go in the direction of a company like Snapchat, which has never really been profitable and doesn’t seem close to ever doing it, and yet they sport a fairly hefty valuation.

01:21:35:08 – 01:21:57:20
Shawn O’Malley
That’s another conversation. Two years ago, I would have thought Reddit was more like Snapchat, but the way they ramped up the business in 2024 and improved monetization while painting a pretty plausible picture for growth going forward that has made me reconsider that assumption and outlook I had when I first participated in the IPO. So I’m not completely sold and added into the portfolio yet.

01:21:57:20 – 01:22:28:07
Shawn O’Malley
I don’t think you are either, but I think we’ll both be moving it to the top of our watch list and probably eagerly tuning in to their quarterly earnings calls to see how things progress. I think even in just 2 or 3 quarters from now, not even five years, the picture could become much clearer around their growth prospects, how they’re able to achieve economies of scale, what sustained profitability looks like for them, and correspondingly, I would update my model and might even want to revisit the decision to add it to the portfolio.

01:22:28:07 – 01:22:38:10
Shawn O’Malley
But we can save that for a future episode. And maybe revisit the company at some point. I think for now, we’re in agreement. It’s not exactly the right time to jump into Reddit shares.

01:22:38:12 – 01:22:55:20
Daniel Mahncke
We are, we are. But at the same time, as you said, I would consider it to be not on top, but maybe a top five position on our watch list. And I’m still very glad you pitched Reddit. And who knows, maybe before we turn into an investor, I turned into an active user.

01:22:55:22 – 01:23:18:01
Shawn O’Malley
Yeah, I love it. I’d love to see you on Reddit. But as always, we’ll leave you with a quote and the wise words of Phil Fisher. He tells us that even a great company could be priced too high if there’s a lot of glamor attached to it. Right. It may very well be a great company. We regret not buying, but it’s priced a little too richly for our taste at the moment.

01:23:18:05 – 01:23:30:22
Shawn O’Malley
With too much uncertainty. We’ll be back again next week where Daniel will assume my role today and be the one pitching a stock. We’ll see you all then.

01:23:31:00 – 01:23:52:16
Daniel Mahncke
One lore in the in the luxury strategy is that your marketing shouldn’t sell products. It should sell a story. And when I walked into that store, I felt the same. I didn’t feel like they want to make me sell the product. It was more about telling me who they are and what they stand for. They are not built to maximize profits.

01:23:52:18 – 01:24:04:12
Daniel Mahncke
Although Montclair stores are actually among the top three most profitable in the industry, they are still part of the story making process and they showcase how the brand views itself.