/AI%20(artificial%20intelligence)/Hands%20of%20robot%20and%20human%20touching%20on%20big%20data%20network%20connection%20by%20PopTika%20via%20Shutterstock.jpg)
Google (GOOGL) has had an undeniable grip on the internet search market for years, claiming a market share above 90%. But this reality is changing rapidly thanks to artificial intelligence (AI). Chatbots like ChatGPT are replacing traditional searches, as users opt for more personalized results and enhanced features like data analysis.
Social media company Reddit (RDDT) has taken notice of this trend, launching its own AI-powered search feature. In response, Morgan Stanley analysts upgraded RDDT stock to an “Overweight” rating, citing “strong fundamentals and GAAP profitability.” Analysts also think AI could be the key to getting Reddit into the S&P 500 Index ($SPX).
About Reddit
Founded in 2005, Reddit operates as a content aggregation, social media, and discussion platform where users interact within specific interest-based communities called “subreddits.” It generates revenue through advertising, premium memberships, and other content-monetization strategies, including ventures in AI and data licensing.
Valued at a market capitalization of $23.28 billion, RDDT stock has been on a tear since its IPO in March 2024, rallying 230% on a year-to-date basis.
Shares are up 30% over the last month, largely fueled by the launch of “Reddit Answers,” a new AI feature designed to help users quickly find answers based on past posts. Starting with access to a limited user base in the U.S., the company will roll out the feature more broadly later.
Reddit Moves Into Profitability
The most recent quarter was the first in which the company reported a profit, with its revenue and earnings both surpassing Street estimates. In Q3, Reddit reported revenue of $348.4 million which denoted growth of 68% from the previous year. Core ad revenue increased by 56% in the same period to $315.1 million.
The company reported EPS of $0.16 per share compared to a loss of $0.13 per share reported in the year-ago period. This marked the third consecutive quarter where Reddit's bottom line has come in ahead of the consensus estimate.
Daily active users (DAUs), a key operational metric for a social media platform like Reddit, witnessed a 47% rise to 97.2 million. Average revenue per user (ARPU) came in at $3.58, a 14% increase from the prior year's figure of $3.14.
Cash flows also remained solid with the company reporting net cash from operating activities of $71.6 million in Q3 2024 compared to an outflow of $7.7 million in the year-ago period.
Overall, Reddit is in an enviable liquidity position after it closed the quarter with a cash balance of $515.9 million, dwarfing its short-term debt levels of $5.4 million.
Strategic Drivers
As a social media platform focused on community building, Reddit boasts over 100,000 communities. The management attributes this strong community foundation to its translation efforts, with plans to expand machine translation to over 30 countries by 2025. Additionally, the company’s partnership with Google has played a significant role in its positive performance this year. In 2024, "Reddit" was the sixth most “Googled” word in the U.S. Its partnership, established in February 2024, allows Google to use Reddit’s data to train its AI models. In return, Reddit benefits from higher rankings in Google search results.
Reddit has substantial potential in data licensing due to its vast repository of high-quality, text-based user content. This extensive dataset, which represents one of the largest public collections of human experiences and interactions, positions Reddit uniquely for leasing data for large language model training. Its partnership with Google exemplifies this opportunity. In Q3, "Other Revenue," which includes data licensing agreements, surged by 547% year-over-year to $33.2 million, highlighting the growing value of this segment.
What Do Analysts Think About RDDT Stock?
Analysts have attributed a rating of “Moderate Buy” for the stock with a mean target price of $127.35 that has already been surpassed. The high target price of $200 denotes upside potential of about 20% from current levels. Out of 17 analysts covering the stock, 10 have a “Strong Buy” rating, 1 has a “Moderate Buy” rating, 5 have a “Hold” rating and 1 has a "Strong Sell" rating.
