Social media site Reddit (NASDAQ:RDDT) has one glaring problem that holds it back from getting ahead. Most of its users don’t log into the platform but simply skim the comments. While that means they can’t create posts or comment on them, most people prefer to just read what others have to say.
That’s bad for Reddit stock because most of the money the social media site makes comes from ads on its homepage that logged in users view.
Since Reddit’s potential for growth is based on user engagement, the fact that most people on the site aren’t engaging with it is a significant problem.
Yet Reddit has a plan that may overcome this flaw in its business that could lead to substantial revenue growth.
Engaging With Ads
According to a Barron’s report, analysts at JMP Securities say Reddit is planning to start running ads in its comments section.
That way users can view them whether they are logged into the site or not. The analysts believe it can attract even more advertisers to the platform to drive revenue significantly higher.
Ad revenue rose 39% in Reddit’s first quarter as a publicly traded company. Ads accounted for 92% of the social media site’s total revenue for the quarter.
Yet the plan is not quite so new as you may believe. Reddit users say the platform has been experimenting with the idea for at least a year now.
A user posted an image of a Walmart (NYSE:WMT) ad in the comments that was promoting Walmart+. Notably, the ad didn’t seem especially relevant to the discussion.
Advertising Backlash and Reddit Stock
More ads in the comments section, though, could also open up the advertisers to user criticism.
Reddit isn’t quite like the old 4Chan forums but there is a lot of trash talking that occurs on the site (there is another word for such posts that can’t be used on a family-friendly investment site) and could open up the advertiser to more negative feedback than they would care to receive.
Worse, they could just be ignored.
Although Reddit claims a User Respondent Survey found 61% of ads on the site are more relevant than on other sites.
The same percentage says they pay more attention to ads they see on Reddit more than elsewhere. Flooding the comments section with ads could stir up a hornet’s nest of negativity.
Moreover, it may induce its logged in users to install ad blockers. It is a problem Alphabet (NASDAQ:GOOG, GOOGL) is facing with YouTube.
The Race for More Revenue
In a bid to increase ad revenue, the video sharing site has been flooding the site with more ads and have them run for longer periods of time.
Where ads used to be five seconds before you could hit the skip button, now they make you sit for 20 seconds or more before skipping them, if at all. Recently ad run times have gone as high as a minute.
It also makes YouTube almost unwatchable.
But ad blocker site SponsorBlock says Google is trying to defeat ad blockers by inserting ads directly into the video stream instead of having them run on top.
Amazon (NASDAQ:AMZN) also started inserting ads into its movies and TV shows too. What was once a safe haven from having to watch commercials has devolved into a race to the bottom where we’re now paying for ads when broadcast TV is free.
Heck, even cable was essentially ad-free.
Short-Term Salve for Reddit Stock
While Reddit’s plan could initially boost revenue as advertisers try to reach a new and different audience, more ads also raise the risk of users ignoring them.
The more you see of something the more it tends to blur into the background. It could have negative implications for Reddit stock too.
Although it might not be as easy as holding your finger over a countdown timer to skip a YouTube ads Reddit comment section ads might not be nearly as effective as the social media site hopes. It may not be the long-term solution Reddit needs to grow.
On the date of publication, Rich Duprey did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.