Deutsche Bank says that Reddit Inc.’s new deal with OpenAI is likely a sign of how much demand there is for the social media platform’s data.
The partnership was announced by Reddit (RDDT, +10.04%) and OpenAI late Thursday night. OpenAI is getting access to Reddit’s Data API and the social media site is adding its content to OpenAI’s ChatGPT service. As part of the deal, Reddit will also give its users and moderators access to new features that are powered by AI. OpenAI will also become a partner for advertising on Reddit.
Benjamin Black, an equity research analyst at Deutsche Bank, says the partnership shows that there is “widespread demand” for Reddit’s data. “Terms were not disclosed, but what was interesting was that OpenAI became a partner of Reddit for advertising and Reddit was able to build AI-powered features on OpenAI’s platform of AI models,” he wrote in a note Friday.
“Like the Google deal, we think the deal may have been sold for less than it was worth because of these extra benefits,” Black said. “However, if the cash terms are like the Google deal, we think it could bring in $54 million a year in EBITDA, assuming 90% higher margins.”
Google Inc.’s GOOGL, +1.08% GOOG, +1.06% Reddit and Google has worked together for a long time. It is said that the Google deal is worth $60 million a year. In February, a new cloud partnership was added to make the deal even stronger.
“At the moment, our model assumes two [large-language model] deals will be signed through 2025, though this second deal came earlier than expected. Now that two have been signed, we don’t think it would be too much of a stretch for two more deals to be signed, for a total of four LLM players using Reddit’s data,” Black wrote in his note.
“Two more deals like this should bring in an extra $108 million a year in EBITDA, which is a 57% increase from our current estimate of $190 million a year in EBITDA for the 2025 fiscal year. If Reddit can maximize LLM deals with six major players, we see a way to $360 million a year in revenue, which would mean $324 million a year in EBITDA.”
Black says that Reddit is also making progress on signing new deals with companies that listen to social media and handle money. Social listening is the close observation and analysis of social media channels. This can be used to give businesses information about their customers, for example.
In light of this, Deutsche Bank raised its price target for Reddit from $62 to $65, and it now rates the stock as a buy.
FactSet asked 15 analysts to rate Reddit. Eight gave it a “buy” rating, six gave it a “hold” rating, and one gave it a “underweight” rating.
Reddit shares ended the day up 10%, while the S&P 500 index SPX only went up 0.1%. Since the company went public for the first time in March, its shares have gone up 23%.
