Reddit (NYSE: RDDT)’s data licensing deals with Alphabet Inc. (NASDAQ:GOOGL)’s Google and OpenAI are set to expire next year, and Wall Street simply can’t decide whether these deals are a windfall or a warning sign.
On September 2, Baird analyst Colin Sebastian reiterated a Neutral rating and $185.00 price target on the stock. The note implies the next big test for Reddit: deciding whether its massive archive of human conversations are still of use to artificial intelligence companies.
According to the firm’s assessment, the current share price reflects an outcome near the firm’s low-end case scenario.
Reddit made a 2024 Google deal that lets Google use its posts to train and power its AI models. Reportedly worth $60 million a year, the deal is set to expire after which Reddit may reportedly choose to block Google’s AI from using its content. A similar deal between Reddit and OpenAI estimated around $70 million is also set to expire soon.
Some other publishers such as USA Today, Reuters, Politico are also re-evaluating whether to let Google crawl their pages as AI summaries reduce referral traffic.
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Bull Case: Google and OpenAI Could Validate Reddit’s Data Advantage
Reddit’s massive archive of human conversation holds immense AI training and grounding power, something that was established in the original agreements made with Google and OpenAI.
Alphabet Inc. (NASDAQ:GOOGL)’s Google expanded its Reddit partnership in February 2024, which enables Google to have access to Reddit’s Data API. This API delivers real-time, structured, unique content from their large and dynamic platform.
OpenAI made a similar agreement the following May, giving its products access to Reddit’s real-time content. CEO Steve Huffman has indicated that Reddit may go for higher fees on the 2027 renewals, shifting from flat to usage-based/dynamic pricing as the company becomes a top-cited source that grounds AI answers.
The bull case for Reddit is therefore that its data retains value even after companies already have access to it for years, majorly because the conversations keep on adding and there is an inflow of new information every day. As of June, the platform had around 130 million daily active uniques and more than 26 billion posts and comments.
Bear Case: Companies Stop Needing Reddit
If companies reduce their dependency on Reddit’s data, the risk becomes larger than just losing the licensing fees. Substantially all of the licensing revenue that comes for the company is coming from the two major sources, as per Reddit.
These agreements could be renewed at lower prices, may use fewer services, or may not be renewed at all.
According to Baird, such an outcome may affect the platform more broadly. However, potential long-term platform benefits still exist.
Analysis and Bottom-line
Hedge funds have been turning optimistic on Reddit before the negotiations moved into focus. At the end of the second quarter, 91 hedge funds held Reddit, up from 70 in the prior quarter. For Alphabet, interest has been increasing, with 275 hedge funds holding positions in Alphabet at the end of Q2, up from 265 in the previous quarter.
Overall, Baird’s note suggests that Reddit’s next catalyst is proving its human-generated content remains valuable enough for Google and OpenAI to keep paying for it. As per the firm, shares already discount an outcome near its low-end renewal case, while the base and bull case scenarios imply roughly $10 and $20 of upside, respectively.
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