Reddit-OpenAI deal highlights demand for social-media platform's data

By James Rogers

Reddit already has longstanding partnership with Google and more deals may be in the pipeline, says Deutsche Bank

Reddit Inc.'s new 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 service, and OpenAI is also gaining access to Reddit's Data API. As part of the deal, Reddit will also offer new AI-powered features to its users and moderators. Additionally, OpenAI will become a Reddit advertising partner.

The partnership suggests "widespread demand" for Reddit's data, according to Deutsche Bank equity-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," Black added. "That said, if the cash terms are similar to the Google deal, we believe it could provide $54 [million] of annual Ebitda, assuming 90% incremental margins."

Related: Reddit shares climb on ChatGPT deal with OpenAI

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.

"Currently in our model we are assuming two [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 four LLM players utilizing Reddit's data," Black added in his note.

"Two more similar deals should generate $108 [million] of additional annual Ebitda, which would be a 57% upside to our current [2025 fiscal-year] Ebitda estimate of $190 [million], and if Reddit is able to maximize LLM deals with six major players, we see a path to $360 [million] of annual revenue, yielding $324 [million] 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.

Related: OpenAI launches new 'flagship' GPT-4o model, touting improved speed and performance

Set against this backdrop, Deutsche Bank raised its Reddit price target to $65, from $62 previously, and has a buy rating for the stock.

Of 15 analysts surveyed by FactSet, eight have a buy rating, six have a hold rating and one has an underweight rating for Reddit.

Reddit shares ended Friday's session up 10%, compared with S&P 500 index's SPX gain of 0.1%. The company's shares have risen 23% since its initial public offering in March.

-James Rogers

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05-18-24 0641ET

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