Businesses valuations and a business' success overall unfortunately don't always correlate to what the business seemingly has to offer. In this case, reddit is not going to be sold as a community website, but rather a marketing tool.
It's as the saying goes - if the service is free, you're the product. I think there will be a decline in active users and overall engagement, which I suspect might lead to fewer ad impressions. Spez is banking on the fact that eliminating third party apps will make up for that.
So long as there is a critical mass of users - which there will be for the foreseeable future, and so long as Spez only goes half Musk and doesn't turn the site into an alt-right paradise, I see reddit potentially becoming profitable. Advertisers who have been scared away from Twitter/X might be looking to go somewhere safer and might find that in Reddit once all this controversy blows over.
And it will blow over in terms of relevance to advertisers. The API controversy doesn't concern the average person. Even a CEO being a petulant child is barely worth mentioning to most.
Reddit users assumed that the site was for them. Spez has made it clear that it is not, that it is for advertisers. As much as I hate to say it, there will be plenty of people jumping on the Reddit IPO from that perspective.