MW Reddit OpenAI deal highlights demand for the social-media platform's data
By James Rogers
Reddit already has a longstanding partnership with Google, and more deals may be in the pipeline, says Deutsche Bank
Reddit Inc.'s deal with OpenAI likely reflects the scale of demand for the social media platform's data, according to Deutsche Bank.
Reddit (RDDT)and OpenAI announced the partnership late Thursday. The social-media platform is bringing its content to OpenAI's ChatGPT and OpenAI is also gaining access to Reddit's Data API. As part of the partnership, Reddit will also bring new AI-powered features to Reddit's users and moderators. Additionally, OpenAI will become a Reddit advertising partner.
The partnership suggests "widespread demand" for Reddit's data, according to Deutsche Bank Research analyst Benjamin Black. "While terms were not disclosed, of note was Reddit's ability to build AI-powered features on OpenAI's platform of AI models and OpenAI becoming a Reddit advertising partner," he wrote, in a note Friday. "In a similar vein to the Google deal, we think the value of the deal may have been sold at a discount given these added benefits. That said, if the cash terms are similar to the Google deal, we believe it could provide $54mn of annual EBITDA, assuming 90% incremental margins."
Reddit and Alphabet Inc.'s $(GOOGL)$ $(GOOG)$ Google have a longstanding relationship. The Google deal, which is said to be worth $60 million a year, was deepened in February with a new cloud partnership.
Related: Reddit shares climb on ChatGPT deal with OpenAI
"Currently in our model we are assuming two LLM [Large Language Model] deals signed through 2025, though this second deal came earlier than anticipated, and now that two have already been signed, we don't believe it would be a stretch for two additional deals to be signed for a total of 4 LLM players utilizing Reddit's data," added Deutsche Bank's Black. "Two more similar deals should generate $108mn of additional annual EBITDA, which would be a 57% upside to our current FY25 EBITDA estimate of $190mn, and if Reddit is able to maximize LLM deals with six major players, we see a path to $360mn of annual revenue, yielding $324mn in annual EBITDA."
Reddit is also making progress on signing new deals with social listening and finance companies, according to Black. Social listening involves the close monitoring and analysis of social media channels and can be used, for example, to provide companies with customer data. Set against this backdrop, Deutsche Bank raised its Reddit price target to $65 from $62. Deutsche Bank has a buy rating for Reddit.
Of 15 analysts surveyed by FactSet, eight have a buy rating, six have a hold rating and one has an underweight rating for Reddit.
Related: OpenAI launches new 'flagship' GPT-4o model, touting improved speed and performance
Reddit shares rose 9.3% Friday, compared with S&P 500 index's SPX decline of 0.1%. The company's shares have risen 22.2% since its initial public offering in March.
-James Rogers
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May 17, 2024 15:07 ET (19:07 GMT)
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