Investors clamoring for more initial public offerings (IPOs) finally got what they were looking for.
Reddit (RDDT 7.02%) splashed into the public market last Thursday, after a long drought in notable IPOs and speculation about whether the social media platform would finally go public.
Reddit's debut did not disappoint. After its IPO was priced at $34, the stock soared nearly 50% on Thursday, though it gave up some of those gains on Friday as the fervor over the social media stock somewhat subsided.
What makes Reddit unique?
Reddit is a unique property in social media. Users are almost completely anonymous. Content is organized around user-generated "subreddits" that reflect almost any type of interest, and there are more than 100,000 of these communities. Within subreddits, content is organized in threads that begin with questions or comments.
Like most social media companies, Reddit makes most of its money from advertising, but there's another revenue stream that makes the stock particularly intriguing. The company sees a significant opportunity in artificial intelligence (AI), using its content to train large language models (LLMs) like OpenAI's ChatGPT.
In fact, Reddit's management has already started to tap that opportunity. In his letter in the prospectus, CEO Steve Huffman argued that "Reddit's vast and unmatched archive of real, timely, and relevant human conversation on literally any topic is an invaluable dataset for a variety of purposes, including search, AI training, and research." He also said the company's "data advantage and intellectual property" will also be valuable in training future LLMs.
Reddit's content is already a foundational part of how LLMs like ChatGPT have been trained. Reddit has begun monetizing that business and expects to generate $66.4 million in revenue in 2024 from data licensing, which compares to $804 million in total revenue last year.
Image source: Getty Images.
How big is Reddit's AI opportunity?
The market for AI training data is so new that it's hard to put a dollar value on it. Reddit said that the broader AI market is expected to grow to $1 trillion by 2027, though it's unclear how much of that will go to providers of training data like Reddit.
It's also unclear what value investors are placing on the site's AI potential. But without it, the stock seems overvalued. Reddit overall is still losing money even though it launched its site nearly 20 years ago. And the stock trades at a price-to-sales ratio of 9, while its revenue grew 21% last year, which is strong but not phenomenal.
None of those numbers is particularly impressive for a typical social media company. What makes Reddit stand out is its potential in AI.
Why Reddit's AI opportunity might not be a gold mine
It's easy to see why Reddit would be a valuable source of content for training AI models, as it has more than 1 billion posts in its archive, dating back nearly two decades and covering a wide range of topics.
However, Reddit is far from the only valuable source of content for training large language models.
For example, The New York Times (NYT -0.18%) sued OpenAI and Microsoft in December, alleging that millions of its newspaper's articles were used to train chatbots that now compete with it without the newspaper's permission.
Other news organizations have made deals with AI companies to use their data for training, but there have also been other lawsuits, including from book authors who claim their works were used without permission.
It makes sense that the Times would be a popular source for training data. Sometimes called the "nation's newspaper of record," it's one of the most authoritative sources of news in the U.S. and in the English language -- and it's been around for more than 150 years.
However, there's no evidence that the stock of the newspaper's parent company is getting a premium for its data's potential value in training LLMs; the stock has actually underperformed the S&P 500 over the past year.
Reddit does have an opportunity in AI training, but if it's a multibillion-dollar opportunity, the company is likely to face stiff competition from sources like the New York Times, other news and content websites, and sites like Wikipedia. Based on the market's treatment of stocks like The New York Times Company, investors don't seem to believe that AI training data is a transformative opportunity, at least not yet. And that should be reflected in Reddit's valuation as well.
