Reddit, Inc. (NYSE:RDDT) may be willing to walk away from roughly $60 million a year to stop Google from turning its discussions into answers that users never leave Google to read. The companies are negotiating a renewal of their 2024 data-licensing agreement, and Reddit has discussed ending Google’s access to its content for AI use, the Wall Street Journal reported on July 22. Reddit, Inc. (NYSE:RDDT) fell 8.7% after the report, its worst session since March, according to Barron’s.
Google can find generic product descriptions and technical explanations all over the web. Reddit is useful because its users argue about whether a product is actually good, describe unusual problems and update old advice. Those conversations answer queries for which polished corporate pages are nearly useless. Reddit can reasonably demand more money or limits on how that material appears in Google’s AI products.
brett-jordan-0FytazjHhxs-unsplash
Walking away would carry a cost beyond the licensing check. Alphabet Inc. (NASDAQ:GOOGL), through Google Search, also sends people to Reddit, where their visits can be turned into advertising revenue. If an AI answer already quotes the useful part of a discussion, however, that referral relationship becomes less valuable. Reddit is effectively being asked to keep supplying an input that may reduce the traffic Alphabet Inc. (NASDAQ:GOOGL) sends back.
The $60 million payment is not large enough to make the decision on its own. Reddit generated $663 million of revenue in the first quarter, of which $625 million came from advertising and $39 million from other sources, including data licensing. Google would lose a frequently updated source of human answers. Reddit would find out how many users seek it out and how many arrive only because Google placed a link in front of them.
Hedge funds had shown considerable interest in Reddit, Inc. (NYSE:RDDT) before this dispute. Insider Monkey’s hedge fund database counted 70 hedge funds holding the stock as of March 31. Seventy holders is notable for a 2024 IPO, though the snapshot says nothing about trades made after the July report.
Short sellers are much more involved in RDDT than in Nvidia, Micron or CrowdStrike, although CoreWeave’s 18.97% short float is higher. At the July 15 settlement, 16.99 million Reddit shares were sold short, equal to 12.34% of float and almost unchanged from the previous report. Four days of average volume would be required to cover them. The double-digit percentage is consistent with persistent doubts about valuation and Reddit’s dependence on outside platforms. Its near-flat reading does not show shorts newly piling in because of the Google talks. It could still amplify a rally if the companies renew on terms that ease the traffic concern.
While we acknowledge the risk and potential of GOOGL and RDDT as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns and doing so within a shorter time frame. If you are looking for an AI stock that is more promising than GOOGL and RDDT and that has 10,000% upside potential, check out our report about this cheapest AI stock.
READ NEXT: 33 Stocks That Should Double in 3 Years and 15 Stocks That Will Make You Rich in 10 Years
Disclosure: None.
