Ever wonder what puts the "intelligence" in artificial intelligence?
Well, wonder no more. Steve Huffman is happy to tell you.
"The AI has to come from somewhere," the CEO and co-founder of Reddit (RDDT) said during a recent interview, "and so the source of artificial intelligence is actual intelligence and that's what you find on Reddit."
Related: Analyst reboots Reddit stock price target ahead of earnings
Huffman, speaking at the Wall Street Journal's Tech Live 2024 event, said that "the Reddit corpus is a significant part of the training of the major foundation models and that's because there's colloquial words about pretty much every topic constantly up to date."
Reddit, which was founded in San Francisco in 2005, enables registered users to submit content such as links, text posts, images, and videos, which other members vote up or down.
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Posts are organized by subject into user-created boards called “communities” or “subreddits.”
"It does seem like there's a general lowering of quality on the Internet because more and more content is written by AI," Huffman said, "which the paradox there is that I think it actually makes Reddit stand out more as the place where there's all of this human content that ends up being used to train AI."
Reddit CEO notes 'arms race'
Reddit is be best known for the 2021 meme-stock craze, in which a group of retail investors collaborated on the "Wall Streetbets" forum to buy shares of highly shorted companies like GameStop (GME) , hoping to force short-sellers to buy shares to cover their bearish positions.
"So there's an interesting connection there," Huffman added, "but what people want is to hear from other people and they want not just the answers and information from other people but also that sense of belonging and connection and community that Reddit."
Related: Analysts revise Reddit stock price target after earnings
The training of AI models has been the source of much controversy.
On Oct. 22, thousands of musicians, composers, actors and authors from across the creative industries signed a statement opposing artificial intelligence companies and developers using their work without a license for training generative AI systems, according to Billboard.
“The unlicensed use of creative works for training generative AI is a major, unjust threat to the livelihoods of the people behind those works, and must not be permitted,” reads the single-sentence statement posted at aitrainingstatement.org.
Within several hours of going live, the statement had been signed by more 11,500 people from across the creative arts, including actors Kevin Bacon and Rosario Dawson; authors James Patterson and Ann Patchett; and music artists Billy Bragg and Max Richter.
Huffman said that Reddit needs to find a way to maintain its value in terms that are still submittable and sustainable for the platform.
“We've been getting scraped every which way," he said. "We've invested a lot in the last couple of years in locking that down, but it's an arms race."
In February, Reddit and Alphabet’s (GOOGL) Google struck a $60 million deal allowing the search giant to use posts from the online discussion site for training its AI models and to improve services such as Google Search.
"Our work with Google will make it easier for people to find, discover, and engage in content and communities on Reddit that are most relevant to them," Reddit said in a statement.
Then, in May, Reddit partnered with OpenAI, the company that developed the ChatGPT chatbot. When ChatGPT, a large language model adept at crunching and parsing large data sets, launched in Nov. 2022, it was the fastest app to reach 1 million users.
Analyst says Reddit strength to come from daily user growth
The arrangement calls for OpenAI to bring Reddit content to ChatGPT and new products with the goal of helping users discover and engage with Reddit communities.
Reddit's stock is up nearly 62% from a year ago, and the social media platform is scheduled to report its third-quarter results on Oct. 29.
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Several investment firms have recently updated their price targets for Reddit, including Roth MKM, which raised its Reddit stock price target to $89 from $66 on Oct. 23 while keeping a buy rating on the shares, according to The Fly.
The firm noted the current contracts with Google and OpenAI for use of the platform's data in training AI models, with Google partnership providing $60 million in annual recurring revenue - ARR - and expectation of Open AI contribution of over $40 million, the firm said.
Roth MKM added that it would recommend buying Reddit shares if there is any post-earning weakness.
B. Riley raised the firm's price target on Reddit to $87 from $75 while keeping a buy rating on the shares ahead of the earnings report.
The company's sales growth is likely to be driven by continued strong growth in daily active users as well as an increase in licensing revenue, while leverage in spending should drive faster growth in EBITDA and margin expansion, the firm said.
B. Riley said that Reddit's commentary on platform improvements, trends in performance indicators, and pipeline for content licensing deals will be key to the stock's near-term performance.
The firm said the target increase stemmed from prospects for higher profitability over the medium to longer term.
Jefferies raised the firm's price target on Reddit to $100 from $90 and maintained a buy rating on the shares.
Among the U.S. Internet group, the firm said it prefers names either skewed to high-income consumers - like DoorDash (DASH) and Uber (UBER) - or with exposure to end-markets nearing inflection - such as ACV Auctions (ACVA) , CarGurus (CARG) and Zillow (ZG) .
Among the group, Zillow remains the firm's top overall pick, while Uber is its top large cap pick, Jefferies said.
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