Reddit (RDDT) stock jumped more than 15% in early trading Friday after the social media platform announced a deal to license its data to artificial-intelligence (AI) research company and ChatGPT parent OpenAI.
The partnership will also allow Reddit to bring new AI-powered features to its users by building on OpenAI's platform. The ChatGPT owner, meanwhile, will become an advertising partner on RDDT's platform.
"Reddit has become one of the internet's largest open archives of authentic, relevant, and always up to date human conversations about anything and everything," Reddit co-founder and CEO Steve Huffman said in a statement. "Including it in ChatGPT upholds our belief in a connected internet, helps people find more of what they're looking for, and helps new audiences find community on Reddit."
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"We are thrilled to partner with Reddit to enhance ChatGPT with uniquely timely and relevant information, and to explore the possibilities to enrich the Reddit experience with AI-powered features," OpenAI chief operating officer Brad Lightcap said about the deal.
This is the second data-licensing agreement Reddit has made this year. In February, the company announced a similar deal with Google, which will bring $200 million in revenue to Reddit over three years, according to Needham analyst Laura Martin.
And Deutsche Bank analyst Benjamin Black thinks the OpenAI deal could increase Reddit's adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) by up to $54 million annually.
"By making Reddit content and communities easier to find, we're able to uphold our belief in the open internet while better serving current users and reaching new audiences," Reddit said in a February 22 statement.
Is Reddit stock a buy, sell or hold?
Analysts are generally positive toward Reddit stock. According to S&P Global Market Intelligence, the consensus recommendation among the 15 analysts following the stock that it tracks is a Buy.
However, analyst' price targets have struggled to keep up with RDDT's fast-and-furious run higher since its mid-March initial public offering (IPO). Indeed, shares are up 27% since then, including this week's 20% surge on the back of a short-lived meme stock rally. Currently, the average price target of $59.80 stands at a nearly 8% discount to current levels.
As such, other analysts could be poised to follow in Martin's footsteps, with the Needham analyst lifting her price target on RDDT stock to $63 from $55 earlier this month.
Along with that price-target hike, Martin added the communication services stock to her Conviction List after its strong earnings report, saying the company's impressive revenue and free cash flow growth, as well as its strong margin expansion are "indicative of RDDT's robust business model,” and added that she was “optimistic about RDDT's data licensing fees from 3rd party large language models."
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