Reddit poised for AI and user growth, analysts say, as they initiate coverage

By James Rogers

Reddit's 'corpus of historical information' could represent a compelling source for large language model training, says J.P. Morgan analyst Doug Anmuth

Newly public Reddit Inc. is well positioned to turn its vast trove of user data into a compelling resource for AI, according to analysts, who initiated coverage of the social-media platform Monday.

"We believe Reddit's digital city comprising 100k+ subreddits represents a differentiated platform to share information, learn, & engage around specific topics/interests," wrote J.P. Morgan analyst Doug Anmuth, in a note. "Reddit is early in ads monetization ($800M revenue in 2023), & the company's corpus of historical information could represent a compelling source for LLM (large language model) training." J.P. Morgan initiated coverage of Reddit with a neutral rating and $47 price target.

Reddit (RDDT)shares rose 1.5% in premarket trades Monday after ending Friday's session down 5.1%. The stock has fallen 16.2% since the company's initial public offering last month.

Related: How the AI potential of Reddit's user data has helped send its stock soaring

The AI potential of Reddit's user data attracted attention following the company's closely-watched IPO, according to stock-market-focused social-media platform Stocktwits. This helped to send its stock soaring in the days after the offering, Stocktwits told MarketWatch last month.

Alphabet Inc.'s (GOOGL) (GOOG) Google and Reddit 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. The two companies announced that Google now has access to the Reddit Data API, which will give the search giant access to "fresher" information.

Reddit itself has been touting the importance of artificial intelligence in its future, noting that its content could be used to feed AI and large-language models. The social-media platform counts OpenAI Chief Executive Sam Altman among its investors.

Related: Reddit stock charges higher, even as it picks up a neutral rating

"From a data monetization perspective, the data corpus of authentic human conversation at Reddit is unique and the dual nature of the Google deal is encouraging as it includes training elements likely for Gemini GenAI models and Search elements to make Reddit conversations more accessible across Google products," wrote Raymond James analyst Josh Beck, in a note released Monday.

"While we see opportunities for other generative artificial intelligence (GenAI) and Search companies to commercialize a license it is difficult to project provided the rapidly developing GenAI landscape and thus we conservatively assume no additional sizeable deals while our bull case contemplates two deals over two years," he added.

Raymond James initiated coverage of Reddit with a strong buy rating and $50 price target Monday.

Gemini Ultra 1.0 is the largest version of Google's large language model, which was released to the public earlier this year. The search giant also renamed its AI chatbot, previously called Bard, as Gemini.

Related: Reddit's debut made a splash, but caution's still the name of the game in the IPO market

The company's user growth is also in the spotlight. "DAUq (Daily Active Unique) growth has accelerated in recent quarters & there is meaningful headroom for growth, but for now Reddit's base of 73M users is relatively sub-scale," wrote J.P. Morgan's Anmuth in his note. "Smaller digital ad platforms have historically struggled to compete w/Google and Meta, & moving down the funnel to more performance-based ads is challenging. But Reddit has low-hanging fruit in improving ad tech, building out self-serve, & growing advertiser count, which should help support 20%+ revenue growth the next few years."

Reddit's DAUq growth is bolstered by platform and search engine results page (SERP) improvements, according to Raymond James analyst Josh Beck. "A host of changes, including a webstack and user interface (UI) rebuild, AI/ML recommendation improvements, large language model (LLM) enabled language translation (French, Spanish, etc.) and an increased SERP emphasis on authentic discussion results likely provide durable tailwinds as we project 8M U.S. logged-in daily active users (DAUs) over the next three years vs. 3M in 2023," he wrote.

J.P. Morgan's Anmuth also weighed the potential duration of Reddit's lock-up period. "Reddit's lock-up will expire the earlier of: 1) the 3rd trading day following the 2Q24 earnings release; and 2) 180 days post IPO," he wrote. "We expect Reddit to report 2Q earnings mid-August, which would be earlier than 180 days after the prospectus."

Related: Reddit's IPO could be a bellwether for other offerings this year

Reddit reports first-quarter results after markets close on May 7. The company's lack of profitability on an annual basis has come under scrutiny in the run-up to its initial public offering. However, Reddit CFO Drew Vollero told MarketWatch that the company swung to a profit between the first and second halves of 2023.

-James Rogers

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04-15-24 0949ET

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