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Does Reddit's (RDDT) OpenAI Partnership Make It Worth Buying?

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Reddit (RDDT - Free Report) shares jumped 11.74% in after-hours trading on May 16, following the announcement of its partnership with Microsoft (MSFT - Free Report) -backed OpenAI.

The deal will bring Reddit content to OpenAI’s ChatGPT and other products and, at the same time, will help the social media company incorporate new AI-powered features into its forums. OpenAI will also become Reddit’s advertising partner.

Since its initial public offering in March, Reddit shares have gained 22.6%, outperforming the Zacks Internet Software industry and the broader Zacks Computer & Technology sector.

Reddit’s Data Trove Makes It Invaluable for LLM Training

Reddit’s huge data trove makes it an invaluable source for big techs like Alphabet (GOOGL - Free Report) division Google, Amazon (AMZN - Free Report) and Microsoft for training their large language models (LLMs). LLMs form the base of Generative AI applications.

Generative AI and AI-related startups like OpenAI have attracted close to $50 billion in investments since 2023, affirming the growing interest in the technology and its applications. Microsoft invested close to $13 billion in OpenAI as it sought to gain a front seat in the startup’s AI innovations. Another startup, Anthropic, raised close to $2 billion and $4 billion from investors led by Alphabet’s division Google and Amazon, respectively, as it sought a valuation of close to $30 billion.

OpenAI’s GPT-4, Anthropic’s Claude 3 Opus, and Google DeepMind’s Gemini Ultra are the three most capable tools currently available in the Generative AI domain.

Reddit Inc. Price, Consensus and EPS Surprise

Reddit Inc. Price, Consensus and EPS Surprise

Reddit Inc. price-consensus-eps-surprise-chart | Reddit Inc. Quote


However, OpenAI and Anthropic are facing increasing competition from their original backers — Microsoft, Amazon and Google, respectively — as these big techs plan to build their own LLMs primarily because these are cheaper to build in-house and they can exercise more control on how to use the models. The OpenAI deal is expected to give them a glimpse of the potency of RDDT’s data in training their models.

Reddit’s partnership with Google, which involves training the latter’s LLMs, has been a game changer. An expanded partnership in February this year made it easier for users to find, discover and engage in content and communities on Reddit that are most relevant to them.

RDDT is already benefiting from growing data licensing deals as other revenues surged more than 450% year over year to $20 million in the first quarter of 2024. This Zacks Rank #3 (Hold) company’s prospects are supported by strong ad revenue growth expectations driven by an expanding user base. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Reddit currently has a Zacks Momentum Score of A, which makes it further attractive.

User-Friendly Steps, Ad Revenue Growth Aid Prospects

Google is playing an important role in expanding its user base as it is getting better at displaying RDDT’s content. In first-quarter 2024, Daily Active Uniques (“DAUq”) increased 37% year over year to 82.7 million. Logged-in DAUq: Global, which RDDT considers as the core metrics of the business, jumped 27% year over year to 43.1 million in the reported quarter.

Reddit’s focus on making the platform faster and more user-friendly is noteworthy. It continues to invest in AI and machine learning to improve relevance, engagement and moderation. RDDT plans to deploy its own trained LLMs to improve moderation. These initiatives are expected to drive user engagement.

Reddit’s plan to monetize its platform through the launch of a revamped version of user awards and Reddit Gold (its virtual currency) bodes well for its future prospects.

Its focus on reducing campaign setup time for self-serve and small and medium businesses (SMBs), as well as the launch of free formats, which provide advertisers with a versatile and creative format to drive deeper engagement with users, is expected to drive ad revenues.

Reddit Pro, a free suite of AI-powered insights and tools, is currently in beta with more than 1000 businesses, including Taco Bell, Wendy’s, NFL, the Wall Street Journal, as well as several SMBs. Shopping also remains on the horizon, with RDDT launching shopping ads and testing dynamic product ads.


Reddit’s user-friendly and advertiser-friendly focus is a key catalyst. Upcoming user interface improvements, better on-platform search capabilities and monetization plans provide strong growth opportunities. RDDT plans to grow revenues twice as fast as cost growth over the long term, which surely makes the stock attractive for investors at its current level.

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