Weekly Update November 17-21
Reddit, Earnings, and some news
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Let’s get right into it!
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Reddit is a fascinating one to me because I still think of it as the fringe of the internet. But it’s really not that anymore. The company is quickly becoming an insanely profitable, advertising juggernaut. I mean, each of the last five quarters of revenue growth have been over 60%. At 68% revenue growth in Q3 and 31% FCF margins, that’s nearly a 100% on the Rule of 40. Those are upper echelon metrics.
The thing that does worry me is active user growth slowing and how much ecosystem control the company has. Last year in Q3, Reddit’s daily active users grew 47%, on the back of Google’s algorithm changes. Most recently, they grew 19% and any changes to Google’s algo can vastly change the user engagement of Reddit. That is a serious risk. It’s a risk because then growth is dependent on ARPU (average revenue per user) which tends to degrade the experience. ARPU is driven by the frequency of ads shown and pricing. And at the end of the day, pricing has an upper limit since there are a lot of other platforms to advertise on. So user growth is key for social networks as it makes them more valuable since the content improves but it also enables the user experience to flourish since you don’t have to increase ad load to still grow revenues.
I love Reddit’s metrics but it’s just that I worry about reliance on Google and that is a big factor in the ultimate value of the business.