Shares of Reddit (NYSE: RDDT) surged by 14% on Friday, buoyed by the announcement of a strategic partnership with OpenAI, a leading artificial intelligence firm. This alliance is expected to enhance the user experience on Reddit's platform through AI-driven features, while also attracting more advertising revenue. As a result, Reddit's stock traded at $64.25 in the premarket session, nearing its highest closing price of $65.11 reached in late March.
The partnership, unveiled on Thursday, allows Reddit to utilize OpenAI's technology to develop advanced tools and features. Additionally, OpenAI's ChatGPT platform will integrate Reddit's content in a "real-time, structured" manner. OpenAI will also become an advertising partner for Reddit, marking a significant step towards fulfilling Reddit's "IPO promise of seizing opportunities to make more of AI," as noted by Russ Mould, investment director at AJ Bell.
Reddit, which predominantly generates revenue from advertising, is keen on diversifying its income streams. In a February filing, the company indicated its intent to explore new monetization channels, including offering creator tools and licensing its data to third parties. Reddit already has data licensing agreements with undisclosed parties that are projected to contribute at least $66.4 million in revenue this year. These licenses allow third parties to access, search, and analyze data on the platform.
With a daily active user count exceeding 80 million, Reddit is considered a smaller player in the social media market. The company went public on the New York Stock Exchange on March 21, and its shares have gained 66% from their IPO price of $34 each. The new partnership with OpenAI comes amidst a series of lawsuits against OpenAI, with firms alleging unauthorized use of their content for training large language models. Despite these legal challenges, OpenAI has secured content licensing deals with several publishers, including the Associated Press and the Financial Times.
Reddit's efforts to diversify its revenue streams are further exemplified by its recent partnerships. In February, Reddit allowed Alphabet's (GOOGL) Google to use its content to train AI models such as Gemini. These partnerships reflect Reddit's strategy to go beyond its core advertising business and drive top-line growth. Earlier this month, Reddit posted its first results as a public company, revealing that 92% of its revenue comes from advertising. The non-ad revenues showed substantial growth, indicating the company's increasing focus on diversifying its income streams.
Following the partnership announcement, top-rated analyst Andrew Boone from JMP Securities reiterated a Buy rating on Reddit stock with a price target of $63, implying an 11.7% upside potential. Based on nine Buy, six Hold, and one Sell recommendations, the stock has a Moderate Buy consensus rating. Analysts' average price target of $58.40 on RDDT stock suggests a 3.6% upside from current levels. Shares of Reddit have gained 22.6% since it began trading on March 21.
