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Welcome back to my deep dive series, where we look into Reddit! In this second installment, we shift our focus to truly understanding Reddit’s business: its segments and products, its customers, its value proposition, the industry it is competing in, and other findings.
By the end of this post, you’ll have a clear understanding of what makes Reddit an exceptional company with both a strong business model and a management team primed for long-term success.
Here’s the table of contents of the series once again:
What this deep dive series covers:
The five-part bull case (”Bam Bam Bam Bam Bam”)
What went wrong
Investment Slide Deck – the deep dive in a highly compressed + visualized form
Every deep dive now comes with a companion slide deck. It’s the whole argument in compressed form – the hypothesis, the business, the competitive position, the valuation, and the case against – for the days when you don’t have an hour to spare but still want the shape of the thing. Paid subscribers get both, the long piece and the deck, on every deep dive from here on.
The origin story
The business itself
Unit economics analysis
The customer
Legal structure, cyclicality, and operating leverage
The moat
Is it a good business in a good industry
Management and governance
Growth drivers and forecasting
Margins outlook
Valuation (including a downloadable model)
Other interesting findings
Before we start!
Before we start, I highly recommend reading part 1 first, in which the high-level hypothesis (five BAMs) is shared in around 15,000 words (packed with qualitative insights and critical thinking; arguably the most thorough analysis of Reddit’s business on the Internet).
Deep Dive: Reddit ($RDDT) – Part 1
There are certain kinds of companies that everyone has heard of, that everyone has an opinion about, yet almost no one has actually studied them in depth. Reddit might be the most recent, purest example of this.
Disclaimer:
As of the date of publication the author owns no shares in the company; but that may change. The analysis presented in this blog may be flawed and/or critical information may have been overlooked. The content provided should be considered an educational resource and should not be construed as individualized investment advice, nor as a recommendation to buy or sell specific securities. I may own some of the securities discussed. The stocks, funds, and assets discussed are examples only and may not be appropriate for your individual circumstances. It is the responsibility of the reader to do their own due diligence before investing in any index fund, ETF, asset, or stock mentioned or before making any sell decisions. Also double-check if the comments made are accurate. You should always consult with a financial advisor before purchasing a specific stock and making decisions regarding your portfolio.
Understanding Reddit!
History
Before I go further into the business, it’s worth slowing down on what this company is and how it got here.
Reddit’s history is unusually instructive, because the thing that makes it valuable now – 20 years of accumulated human conversation – is the direct product of two decades of decisions, crises, and near-misses.
You don’t get the unique asset Reddit represents today without the history, without the ups and downs and the occasional hiccups. So let me walk through it.
Founding and Early "Exit": From 25 links to the front page of the internet
Reddit began in June 2005 as a project by two University of Virginia roommates, Steve Huffman and Alexis Ohanian, in the inaugural class of the startup accelerator Y Combinator.
The idea they pitched wasn’t Reddit at all. It was a mobile food-ordering service called MyMenu, and Paul Graham rejected it, steering the pair toward a link-aggregation site instead.
“Their idea was bad though. And since we thought then that we were funding ideas rather than founders, we rejected them. But we felt bad about it. Jessica was sad that we’d rejected the muffins. And it seemed wrong to me to turn down the people we’d been inspired to start YC to fund.
I don’t think the startup sense of the word “pivot” had been invented yet, but we wanted to fund Steve and Alexis, so if their idea was bad, they’d have to work on something else. And I knew what else. In those days there was a site called Delicious where you could save links. It had a page called del.icio.us/popular that listed the most-saved links, and people were using this page as a de facto Reddit. I knew because a lot of the traffic to my site was coming from it. There needed to be something like del.icio.us/popular, but designed for sharing links instead of being a byproduct of saving them.
So I called Steve and Alexis and said that we liked them, just not their idea, so we’d fund them if they’d work on something else. They were on the train home to Virginia at that point. They got off at the next station and got on the next train north, and by the end of the day were committed to working on what’s now called Reddit.“ - Paul Graham
What they built was a plain page of links they liked to call the front page of the internet. On August 13, 2005, real user posts filled the home page for the first time, a small milestone that mattered because it meant the thing had users.
“I think of August 13, 2005 as the day Reddit really came to life. We had been online for a couple of months, but until then there had never been enough posts from users on any day to fill the front page. That morning, to my surprise, I opened Reddit to discover the home page was overflowing with posts from real users for the first time.“ - Reddit Co-Founder in the S-1 Filing
Later that year Reddit merged with Aaron Swartz’s Infogami, folding Swartz’s Python framework into the core stack and adding his architectural fingerprints to the early product.
Then came a decision that has aged strangely. In October 2006, barely a year after launch, the founders sold Reddit to Condé Nast, parent Advance Publications, for somewhere between $10 and $20 million, and left soon after.
At the time it looked like a clean win for two young founders. In hindsight, it’s cited as one of the great corporate undervaluations in tech history. The Condé Nast years did serve a purpose, though. They gave a bandwidth-hungry site the capital to survive its own growth. And in 2008, Reddit made the single most important architectural choice of its life: it launched user-created subreddits, which decentralized the platform into interest-based communities and, almost as a side effect, shifted moderation from an engineering chore into the hands of volunteer community moderators.
The self-governing city that defines Reddit today was born in that one product decision. The Data API arrived the same year, a detail that becomes enormously important 15 years later.
“Reddit has become one of the internet’s largest open archives of human experiences and Reddit data can be utilized in many ways – to both improve our platform and for commercial application. Since introducing our Data API in 2008, we have seen thousands of applications built – tools, and utilities dedicated to improving the user experience. While we recognize that many of our users enjoy using third-party applications that contribute to Reddit in many important ways, we also concluded that we needed to better manage infrastructure and opportunity costs – especially with commercial entities that require large-scale data use from our API.“ - S1 filing
In 2011, Advance spun Reddit back out as an independent company while keeping majority equity, restoring operational autonomy to a business that had grown culturally huge and financially unprofitable.
Reddit General Manager Erik Martin said in an interview back then that Reddit was getting 700,000 page views a day (about 21 million views per month) when it was acquired in 2006, and by 2011 it was getting 1.6 billion page views a month on 21 million unique users.
A decade of governance crises
For most of its first ten years, Reddit ran on something close to free-speech absolutism, and that stance repeatedly collided with reality. The mid-2010s were genuinely chaotic. CEO Yishan Wong, who took over the CEO role only in 2012, resigned in 2014 over, of all things, an office real-estate dispute, handing the role to interim CEO Ellen Pao. Pao absorbed the community’s fury when she banned notoriously toxic subreddits and, separately, when the company fired popular employee Victoria Taylor – an episode that triggered a site-wide moderator blackout in 2014 and 2015.
Victoria Taylor was the Director of Talent who managed high-profile Ask Me Anything (AMA) sessions on r/IAmA. She was fired without warning or a transition plan for the volunteer teams who relied on her. The sudden loss stranded live Q&As and ignited "AMAgeddon" – a massive strike where volunteer moderators locked down hundreds of popular subreddits to protest corporate miscommunication, poor moderation tools, and executive efforts to commercialize the platform. The site-wide shutdown disrupted major traffic across Reddit, forcing public apologies, the resignation of interim CEO Ellen Pao, and promises from management to provide direct support and improved resources for the platform's volunteer workforce.
It was the first time the community demonstrated, at scale, that it could turn off the lights. It would not be the last.
Then, Huffman came back as CEO in July 2015, and his return marked a strategic turn as much as a personnel one.
He replaced the wild-west ethos with formal content policies, systematically banning illegal, non-consensual, and explicit hate content, and he began the long, unglamorous work of modernizing infrastructure that had been neglected for years.
The political flashpoints kept coming. Subreddits like r/The_Donald became centers of platform manipulation and hate speech through the 2016 and 2020 election cycles, and in June 2020 Reddit permanently banned it, closing the book on its absolutist era.
That same month, Ohanian resigned from the board amid national unrest (at the height of the Black Lives Matter protests) and explicitly asked to be replaced by a Black director, following earlier allegations from Pao that the platform had long tolerated racism – a promise Reddit fulfilled shortly after by appointing Michael Seibel, former CEO of Y Combinator. These weren’t sideshows. They were the company slowly learning that a platform built on human speech has to decide what kind of speech it will host, and that every such decision costs it something with some part of its base.
Building the money machine, and the revolt it provoked
The commercial Reddit really starts around 2016. The company had served ads since 2009, but serious monetization didn’t begin until it started investing heavily in proprietary ad technology later in the decade; arguably meaningful monetization efforts did not begin until 2018.
“We started selling advertisements on Reddit in 2006. We began more meaningfully investing in our own ad technology and foundation in 2018. We built our advertising business by focusing on top U.S.-based advertisers, and over time we have expanded our focus towards mid-sized and smaller advertisers as well as new geographies. We believe we have a significant opportunity to increase our revenues from existing customers, as well as attract more advertisers to Reddit by enabling more ways for customers to invest to grow their business on Reddit, and intend to continue to make technological investments in this area. […]
We believe we are in the early stages of monetizing our user base, and we plan to expand our monetization efforts in ways that build on the core values of our platform. We plan to drive growth in advertising revenue by focusing on initiatives to support advertising improvements, including increased use of artificial intelligence in our advertising solutions. We also intend to open additional monetization channels for Reddit by providing our users and creators with the requisite tools and incentives to drive continued creation, improvements, and commerce. […]“ - S-1
Reddit acquired the video platform Dubsmash in 2020 and contextual-ad firm Spiketrap in 2022, rebuilding its ad-bidding stack to go after the performance marketers who almost exclusively focus on Meta and Google.
Somewhere in this stretch, Reddit, somewhat quietly, won the war for online advice, outlasting Yahoo Answers and Quora to become the internet’s default forum for human recommendations – the very position that makes it indispensable to AI models today.
Two events in the early 2020s defined the modern company. The first was cultural proof of power: in January 2021, r/WallStreetBets drove the GameStop short squeeze, showing that Reddit could coordinate mass consumer behavior well enough to bloody actual hedge funds.
The second was the fight that set up everything we discussed in part 1 of this series quite extensively already. In mid-2023, Reddit announced paid API tiers at $0.24 per 1,000 requests, explicitly to stop AI companies from scraping its conversation data for free. The pricing was steep enough to kill high-profile third-party apps like Apollo, and the community erupted (which may be an understatement) – more than 8,000 subreddits went dark in protest.
This time Huffman refused to fold. He threatened to replace uncooperative moderators and asserted, bluntly, that the communities were corporate assets. It was an ugly, revealing moment. It was also, in cold commercial terms, the decision that made the data-licensing business possible. You can dislike how it was handled and still recognize that the API fight is why the “other revenue” line exists at all.
Reddit API Controversy Timeline
April 18, 2023: Reddit announces plans to start charging for access to its Data API (which had been free since 2008), primarily targeting tech companies using Reddit data to train large AI models.
May 31, 2023: Christian Selig, developer of the popular iOS client Apollo, reveals that Reddit’s proposed rates ($0.24 per 1,000 API calls) would cost his app roughly $20 million per year, making operation financially impossible.
June 5–8, 2023: Popular third-party applications – including Apollo, Reddit is Fun (RIF), Sync, and BaconReader – announce they will shut down permanently on June 30 rather than incur unmanageable debts.
June 9, 2023: CEO Steve Huffman (”spez”) hosts an Ask Me Anything (AMA) to address community backlash, but his refusal to walk back prices and allegations against developers further inflame anger.
June 12–14, 2023: Over 8,000 subreddits participate in a planned 48-hour “blackout” by making their boards private or restricted, pulling down massive chunks of the site and causing temporary global outages.
June 15, 2023: A leaked internal memo reveals Huffman telling staff that the blackout had “no significant revenue impact” and “will pass,” prompting hundreds of subreddits to extend their blackouts indefinitely.
June 16, 2023: Reddit leadership begins sending warnings to volunteer moderation teams, threatening to strip them of their privileges and replace them if they do not reopen their communities.
Late June 2023: Users adapt their tactics to avoid mod removal. Communities like r/pics and r/aww vote to post exclusively photos of comedian John Oliver, while others reclassify subreddits as NSFW to cut off Reddit’s advertising revenue.
June 30, 2023: Apollo and several other major third-party clients officially turn off their servers.
July 1, 2023: The new paid API terms officially take effect.
July 20–24, 2023: During the annual r/place digital canvas event, users coordinate mass pixel art depicting protest slogans directed at Huffman (”Fuck spez”).
The IPO and the pivot to seekers
Reddit reached the public markets on March 20, 2024, listing on the NYSE under RDDT at $34 a share, roughly a $6.4 billion valuation, raising around $748 million.
In a gesture that fit its history, it set aside a slice of IPO shares – about 8% – for its most active users and moderators through a directed share program, letting the citizens of the city become owners of it.
The commercial engine spun up fast from there. A multi-year Google data deal reportedly worth around $60 million a year gave Google real-time access to Reddit content for LLM training, and an OpenAI partnership wired Reddit data into ChatGPT, establishing the company as a core vendor to generative AI.
Revenue pushed past the $2 billion mark on the back of programmatic ads and high-margin licensing, net income turned positive for the first time in Q3 2024, and the balance sheet strengthened enough to authorize a $1 billion buyback.
Interestingly, Reddit recently evolved its mission statement to “empower communities and make their knowledge accessible to everyone.” Read that carefully as it signals a strategy shift… The old Reddit was built for its logged-in members. The new mission explicitly embraces the seekers arriving from search engines and AI models as a core audience rather than incidental traffic – the tourists from Bam #2 in part 1, promoted to first-class citizens.
So where does that leave Reddit in its life cycle?
The honest answer is: it’s still to be determined. And in fact, Reddit might be in two ages at once:
As a platform, it’s 20 years old, celebrating that anniversary in 2026, mature in its culture and entrenched in its niche.
As a monetized business, it’s barely a toddler – it only became profitable in late 2024 and is still switching on entire revenue streams it has never monetized. The company is posting start-up-like growth, and it remains to be seen how durable these growth rates will prove to be.
That’s the whole investment setup. An old, established asset in the early innings of learning how to make money from itself.
The history explains why the asset is so hard to replicate and took decades to build. The youth of the monetization engine is why there’s an investment hypothesis worth testing at all.
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