[IN-DEPTH ANALYSIS] Reddit's Monetization Struggle: Is the Business Model Sustainable?

Key Takeaways:

• Monetization: Ad-resistant users, reliance on Google, lack of influencer ecosystem and weak recommendation algorithms limit its monetization potential.
• Strong Growth: Recent rapid ad revenue growth and achievement of profitability showed its ongoing efforts to improve monetization.
• Valuation: Using P/ARPU suggests still a bit overvalued, fair range $90–$145.

TradingKey - Humans naturally have the desire to share their knowledge and express opinions no matter what their social status is. This is how these online platforms have come into existence over the years. Whether it’s in the format of text (Reddit, Quora), videos (YouTube, TikTok), or pictures (Pinterest), these platforms aim to fulfill this innate human desire.

However, platforms like YouTube and TikTok (videos) or Pinterest (images) have figured out how to generate significant commercial value, text based platforms like Reddit inherently have a flaw to monetize, and when you add issues like user resistance to ads and censorship, it gets even harder. If you were one of the first interest users 30 years ago in China, you might remember Tianya, once the largest text-based forum in China. It rose to prominence, peaked, and eventually became irrelevant. Why? And could Reddit be heading down the similar path?

Source: TradingKey

Reddit’s User Base: Double Edged Sword

Let’s first look at Reddit’s user profile:

• 50%+ Americans
• 60%+ males
• 60%+ Millennials or Gen Z
• 45% users have higher education.
• 60% households earn more than $75,000 annually.
• Interests topics include gaming, tech, sports, finance, and Computer Science.
• Prefer professional, high-quality content.
• Spend quite a lot of time online, high engagement and interaction.

Does it ring a bell to you? This group of users are typically active, highly opinionated, knowledgeable, skeptical and hard to please. They are quick to identify things that are not authentic enough, making it hard to monetize or extract value from them.

Issue 1: Advertising on Reddit Is Tricky

How many users and how much time they spent on Reddit, are core to the business, because it means Reddit can show more ads to more people and get higher quotes from advertisers.

But here’s the problem: Reddit’s users hate ads.

1. Resistance to hard-sell advertising

Traditional or direct ads or posts that feel like advertising will be disliked by users. Any exaggerated and false propaganda will be quickly identified by users, so advertisers must use more creative ways to insert advertisements, such as content seeding, sharing guides, in line with the platform's tone, learn some popular jargon on Reddit, create an atmosphere, and mingle with users in order to obtain better traffic. This is generally more challenging for advertisers, especially when more brands are adopting AI to create ads for low cost and high efficiency.

2. Content is not brand-safe

Since users on reddit are anonymous, they are more inclined to vent some critical, controversial, or outright negative discussions. Many subreddits are simply not suitable for advertising due to the nature of content, and brands certainly don’t want to risk being associated with negativity or controversy, which damages brand value.

3. Smaller brands can shine

On the other hand, niche brands, through humorous and more authentic language style to post content, can build brand loyalty by engaging users with more effort and creativity.

Issue 2: Unlogged Users

Here’s a surprising stat: 55% of Reddit’s users don’t even log in.

Source: Reddit Earnings Reports, TradingKey

1. Dependence on Google Search

Logged-in users have a higher stickiness to the community and interact more on reddit, while users who unlogged-in are largely guided to reddit after searching for some questions on Google, so you see, it’s highly reliant on Google Search algorithm. In 2024, Google updated its algorithm to penalize low quality AI and non-original content. Some content on reddit was harmed in Google searches, affecting the growth of unlogged DAU, and also making investors doubt the natural appeal of Reddit.

2. Not enough incentive to log in

Since users can see all the content without registering, the motivation for users to register is weakened. Users see little reason to create an account unless they want to post or comment.

Unlike social platforms such as Facebook and Instagram, Reddit does not have a strong social relationship chain. The interaction between users is more based on interests rather than interpersonal relationships, which makes users lack a sense of belonging and social pressure to register and stay active.

3. No influencer ecosystem

On platforms like Twitter, users follow influencers (KOLs) and build emotional connections, which brands can leverage for marketing. On Reddit users are more concerned about content and topics rather than following a certain author. This makes it difficult for reddit to have high-traffic KOLs with a strong influence to affect user choices, which means that advertisers cannot use KOLs to sell products, so Reddit lose an advertising revenue channel.

Issue 3: Weak Monetization

Reddit sits on a massive user base, but it struggles to translate to revenues. The platform is heavily dependent on US market, with little success in monetizing international users.

Source: Reddit Earnings Reports, TradingKey

1. Ineffective recommendation algorithm

Unlike TikTok’s addictive, super-personalized feed, Reddit’s recommendation system is far less effective. On the one hand, Reddit’s content is mixed with text, pictures and videos. The diverse format and slower pace make it difficult to categorize and then recommend. User browsing and interactive behaviors are complex, and the algorithm is difficult to capture interest signals as quickly and accurately as TikTok.

On the other hand, Reddit users mostly browse anonymously, with a low ratio of likes and comments, resulting in limited personalized behavior data obtained by the algorithm, affecting the accuracy of recommendations.

2. No clear paid content model

Vertical communities such as Glassdoor can charge users for company reviews and universal platforms like Twitter can leverage strong social connection and high login to use paid subscriptions to drive revenue, leveraging strong social connections and high login rates.

Their business model is more direct and clearer. Reddit, however, hasn’t found a strong paid content model that resonates with its users.

At the end of the day, Reddit has tons of DAU, but it hasn’t figured out how to monetize them effectively.

Valuation

Advertising revenue is the core revenue driver for Reddit, accounting for 90% of total revenue. Reddit began commercializing its advertising around 2006, but on a very small scale. It wan’t until 2018 that it began to systematically upgrade its advertising platform. Its advertising revenue increased significantly from 2023 to 2024, and it achieved profitability for the first time. Other revenues include licensing for AI training and subscription like Reddit Premium, but remains small portion.

Source: Reddit Earnings Reports, TradingKey

The platform is still in early stage of transforming its business model. Despite improvements in advertising products and targeting technologies, challenges remain like the issues mentioned above. The company is still fast-growing, with strong core advertising revenue and has now started to make profit. Fast growth plus early profitability stage often presents high-return opportunities, although with higher risks. The business has not reached a fully mature or stable stage. The sustainability of this growth, however, depends on how effectively Reddit can address these fundamental limitations, and develop a sustained profitable model.

Source: Reddit Earnings Reports, TradingKey

To assess Reddit’s valuation, we use P/ARPU metric, based on Reddit’s special business model. You can see from the table below Reddit’s P/ARPU is significantly higher than average. Considering Reddit’s growth, margin and DAU is better than Pinterest, and Reddit clearly couldn’t compete with Meta. I would give the fair P/ARPU multiple between 25-40x, put its stock price in the $90–$145 range. At its current valuation, Reddit still a bit overpriced, but if the price hits around 90, it would present a good opportunity.

Source: Reddit, Snap, Pinterest, Meta, Alphabet Earnings Reports, Backlinko, TradingKey