Reddit (RDDT -0.31%) isn't sure that its current agreement with Alphabet (GOOG +1.75%)(GOOGL +2.04%) makes sense anymore. According to a report from the Wall Street Journal, the social media giant is contemplating a significant move: not making its content available for chatbots.
While Alphabet's Google Search does drive a lot of traffic to Reddit, it has also been declining, with users turning more to artificial intelligence (AI) chatbots such as OpenAI's ChatGPT or Alphabet's Gemini for answers. And those chatbots have been trained with online content, including Reddit's popular online message boards.
A possible change in strategy for Reddit would be a bold move, but I believe it's the right one.
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Reddit's revenue growth remains strong, but AI could pose a serious threat
Reddit has a strong brand, with its communities being known for often offering balanced, two-sided arguments on common questions. Unlike a typical search query, which may just provide a direct answer, Reddit can offer more value to people seeking deeper analysis and thought. Due to its popularity, the social media giant has been experiencing significant growth in recent years, with ad revenue accounting for the lion's share of its top line.
RDDT Revenue (Quarterly YoY Growth) data by YCharts
The problem with AI chatbots, however, is that they can significantly impact traffic to Reddit if users get more complex answers without visiting the site's forums.
In 2024, Reddit and Google reached a $60 million-per-year deal that would allow Google to train its AI on Reddit's content. However, that may not be worth the long-term risk that it runs to Reddit's business, and it's a small fraction of the $2.5 billion in revenue the company has generated over the past four quarters. Reddit is reportedly considering not renewing its licensing deal.
NYSE: RDDT
Key Data Points
Is Reddit's stock worth buying right now?
Reddit is right to question whether its AI deal makes sense. It should consider a far more lucrative agreement with Google to compensate it for the current and future traffic losses it may experience. It may simply be that a deal can't be reached, but it needs to protect its business and brand; if users can find the same types of answers from a chatbot, there may no longer be a need to visit Reddit's online communities.
Overall, Reddit's brand still appears strong, and the company does have leverage given the value and wealth of information it offers AI chatbots; I think it would be premature to worry about its business right now. With the stock down more than 20% this year, now may be a good time to buy it on the dip.
