What's Happening at Reddit?

The company is a sleeping giant in the world of AI

Tech news last week was dominated by discussion of DeepSeek – a foundation model that supposedly cost just $6M to train. If true, it’s orders of magnitudes cheaper than the training and compute that was required to build incumbent models from OpenAI and Anthropic. It blew open the Overton window on how people think about the economics in the AI stack and what’s most investable.

Two of my long-held investing principles are:

1. Invest in things that make the world more productive

2. Scarce resources accrue value

The second is particularly relevant in the post-DeepSeek world. Foundation models used to be a bottleneck: training was expensive so only a few large, well-capitalized players could afford to develop them. We’re seeing that change in real-time – from launches like DeepSeek, but also from advancements in distributed / parallelized training.

In that world, two of the scarcer resources are data and attention. Data is a well-discussed bottleneck in building LLMs. AI experts far more knowledgeable than me have discussed it here, here, and here.

Attention is scarce because humans have a limited number of hours in the day. Netflix famously expanded its addressable market by “competing with sleep.” But even competing with sleep can only go so far. Winning attention is valuable because consumers are some of the least margin-sensitive, most irrational customers.

Almost ironically, attention is the top-of-funnel for creating new data. There’s one company that sits at the intersection of both: Reddit.

Here’s why I think Reddit is a sleeping giant in a world dominated by AI.

Reddit Today

Reddit is one of the largest sites in the world. It consistently ranks in the top 10 most-trafficked websites in the world. The company’s app boasts over 120M installs.

Impressively, user numbers continue to grow. Company filings show DAUs have increased at an average rate of 35% YoY for the past couple years – with DAUs even surpassing 100M this past quarter! To put these user numbers in context, there are only about 30 companies with 100M monthly active users.

Those unique eyeballs are top of funnel for the content created and gathered on the platform. Reddit doesn’t directly report stats posting, but they did share that their Ask-Me-Anything feature grew 5x and conversion rates on ads improved by over 50%. This matters because passive eyeballs don’t create new data; active posters & clickers do.

Embracing AI

Reddit appears to be barely scratching the surface with AI. That’s likely to change.

Here’s CEO Steve Huffman’s recent commentary on how Reddit is thinking about their advantage in producing data and incorporating machine learning:

Okay. I'll take it. Look, we're in the market, so there's basically kind of, call it, a barbell of customers. So we've got the big customers on the training side where we're still in conversations with folks, but there's a limited number of deals there. And then there's more customers. That would be smaller deals. We've done a number of deals there that are less training and more real-time access to information on Reddit, social listening, financial services. Those would be the customers we're targeting there.

Look, I think it's still early days for us here. We've built the kind of enterprise level kind of APIs to support this business. I'd say for us, it's a nice-to-have business, and we'll keep those conversations going. But if we're thinking about the future of Reddit, it's really our ads business, it's search, it's more of our kind of on-platform initiatives. But I think the story here is Reddit's data is extremely valuable. It's extremely valuable for a lot of players in the market, including to ourselves. And as I said in my opening remarks, Internet consumers broadly are trying to find Reddit's content for various reasons.

And so look, we're open and we're open for business. And I think finding the right balance between making this information accessible and building our own products on top of it is how we think about this.

When it comes to technological change, companies can be bucketed as either drivers (those pushing forward the frontier) or riders (those that can incorporate the new technology in service of their same end mission). For AI, Reddit is both.

Reddit as a Driver

The mass amounts of data produced by Reddit are how the company can help drive AI: the data is valuable as an input to the training and fine-tuning of LLMs.

Until last week, it appeared that there might only be a few large customers in the market interested in leveraging Reddit’s data for training. DeepSeek may have changed that: if building foundation models becomes cheaper (and thus more accessible), the number of customers interested in data licensing agreements could balloon.

The other category of “data customers” are those interested in real-time access to Reddit’s data. For these customers, what matters is the frequency and amount of new data Reddit produces.

Historical data is useful for creating a baseline level of knowledge and facts within a model. It’s an important foundation. Real-time data helps inform models (and the applications of those models, e.g. agents) on what to do next.

Reddit is clearly leaning into products and features that promote the creation of real-time data – from exploring sports deals, to supporting more official government accounts, to doubling down on platform conversation components. These three categories (sports, news, and live entertainment) are ones where information ossifies quickly, so much of the value comes from being the most up to date. I expect we’ll see Reddit continue to build products that promote the creation and sharing of real-time information.

Reddit as a Rider

Reddit can also leverage LLMs to improve its core business – in effect, “riding” the technological wave.

We’re seeing some of this already:

• Reddit acquired Memorable AI, a company that utilizes generative AI to enhance ad campaigns

• Recent filings highlight significant improvements in ad conversion rates

• The company is leveraging machine learning to translate a greater amount of content on the platform

But that’s just the start. One playbook could be to follow what X did with Grok: Reddit could build its own, custom LLM trained on proprietary platform data. Or, taking inspiration from Midjourney’s Discord integration, Reddit could embed generative AI products directly into its feeds and use the existing communities and conversation features to supercharge the collaborative creation process. And yet another path could be to lean all the way into agents and create subreddits / tooling tailored for agents (and/or create a credentialing system for user-generated vs. agent-generated content).

The point is that there are many ways Reddit could ride the AI tsunami. As long as Reddit continues to own end user attention, its options for incorporating new technology should be near endless.

Concluding Thoughts

Reddit certainly seems well-positioned for a world of exponentially more AI.

But the undiscussed elephant in the room is Reddit’s valuation. As of this writing, its market cap is $35B – a 31x P/S multiple. The company only just reported its first profitable quarter (a significant amount of which was driven by well-timed cryptocurrency sales). It definitely doesn’t look cheap.

“I find far greater intellectual satisfaction in trying to understand why a company might be undervalued at 65 times forward earnings than seeking comfort in a seemingly low valuation.”

- Christopher Tsai, Tsai Capital 2024 Year-End Update

Looking at Reddit today feels like an exercise in trying to understand how rapidly a TAM can change and expand. On the one hand, the valuation using backward-looking metrics feels sky-high. But on the flipside, if it is true that Reddit is set to both drive and ride the explosive innovation we’re seeing from AI, then maybe the current business is only a fraction of what’s to come.

For example, licensing is still a relatively small portion of Reddit’s revenue. Throughout the past few quarters, licensing represented approximately 10% of company revenue. As the company continues to iterate on that business model – and as the universe of potential customers grows – it’s very possible that licensing will increase as a share of revenue mix. At the very least, I expect the its contributions to total top line (in absolute dollars) will grow materially.

Whether that’s enough to justify or even propel the valuation? I don’t know. But it’s still fun to reason about. And there’s a lot we’ll probably learn about data, licensing, and the economics of attention as the company continues to evolve.

On the whole, Reddit is one of the companies I’m most excited to keep an eye on as AI increasingly impacts our lives.