Wait. Why is Reddit losing so much money? (2024)

But it's still a lot of money to lose selling a free product. Right?

It's not unusual for tech companies to lose money as they're going public. And when they do, the rationale is usually that these are young, fast-growing businesses, and investors are getting a chance to get in early.

But Reddit is no baby: It started nearly two decades ago, in 2005. Condé Nast, the magazine giant, bought it in 2006 and spun it out as a stand-alone company in 2011.

Reddit kind of anticipates this critique in its investor docs, and argues that it didn't really start operating as a serious business until 2018 when it finally started "meaningful monetization efforts" — that is, trying to make money for real.

But that's still six years ago. What has Reddit been doing since then?

One big, obvious answer: It has been hiring a lot of engineers and spending a lot of money on their salaries.

Last year, Reddit's spending on research and development — which it says is money spent primarily on "engineers and other employees engaged in the research, design, and development of new and existing products" — totaled $439 million, an eye-popping 55% of its revenue. (Note: There are some dumb stories floating out there about Reddit CEO Steve Huffman getting paid $193 million last year. You can ignore those in general since they are really about stock and options awards with a long vesting period. And you can specifically ignore them for this story since those costs aren't included in the R&D totals.)

By comparison, when Facebook went public in 2012, R&D was 10% of its revenue. Last year, when it was building things like virtual-reality goggles, that number had bumped up to 29%.

When Twitter went public in 2013, R&D was 44% of revenue. And at the end of 2021, the last year it filed a public statement before Elon Musk bought the company, that number was down to 25%. Bear in mind this was a company that both Musk and Twitter management thought was overstaffed.

Those numbers puzzle me. Reddit works great for the people who love it, and there are a lot of them. But one of the reasons it works great is that it's a pretty bare-bones product that does what it's supposed to: It lets people post something they're interested in and then lets other people comment on it. That's it. That's the whole thing.

Reddit is adding users — a bright spot with caveats

What am I missing? I asked Reddit comms for comment, but they declined, citing the company's quiet period before the IPO.

The best argument I can make in its defense is that Reddit is still adding a lot of users and that more users equals more ad money. (Of note: The Verge's Alex Heath argues that a lot of Reddit's recent growth has come from a surge of Google traffic. And as any digital-media company can tell you, traffic surges from platforms can also get shut off, very quickly.)

Plus, there's more money coming from the AI-training-data deal it did with Google (hey, Google again!). And that money is basically cost-free, so that's going to make the margins look better, too.

Is that enough to make investors comfortable with a theoretical $5 billion valuation? Am I missing something? Feel free to email me and let me know.