Is the Reddit-ChatGPT Love Affair Over?

As far as IPOs go, Reddit (NYSE: RDDT) had been enjoying a best-case scenario since debuting on March 22, 2024. Since then, the tech stock has risen more than 360%. And while shares of RDDT experienced a dramatic correction of nearly over 61% earlier this year, they bottomed along with the broad market and have rebounded around 144% since.

Shareholders certainly weren’t complaining. But last week, the social news aggregation and forum social media platform saw its stock sustain a major hit as reports circulated that OpenAI’s ChatGPT was reducing its reliance on Reddit user-generated content. 

According to data from artificial intelligence (AI) search engine tracker Promptwatch, Reddit content was previously cited in more than 14% of ChatGPT responses. But last week, that figure plummeted to around 2% of ChatGPT responses. The slowdown was attributed to Alphabet's (NASDAQ: GOOGL) search engine subsidiary Google changing its rules on indexing, thereby limiting the number of results ChatGPT can access. 

As a result, between Sept. 29 and Oct. 1, shares of RDDT fell by more than 16% as the market reacted negatively to the news. With Google still in control of search, and its own generative AI, Gemini, competing for AI market share, the fallout for Reddit poses the question: Will ChatGPT’s reduced reliance on the platform continue to hurt the stock? 

Reddit’s Primary Revenue Driver Remains Intact 

The news puts Reddit at a crossroads. While the company’s primary revenue source—online advertising—remains unaffected, the company has recently expanded into licensing agreements that allow companies leveraging AI to use its user content and data for training purposes. 

One example of that is a partnership the company entered into with Google in February 2024. That multi-year licensing agreement, which was reported to be worth $60 million per year, granted Google’s AI models access to Reddit content and data while providing Reddit with access to Google’s AI technology to enhance its platform. 

Just a few months later in May 2024, Reddit entered into another similar licensing agreement with OpenAI, which is worth as much as $70 million per year. 

Still, Reddit’s primary source of revenue continues to be advertising. When the company reported Q2 earnings on July 31, it announced that ad revenue was $465 million, representing an 84% increase from the same quarter a year prior. 

Reddit’s active advertiser count climbed 50% year over year (YOY), driven by new offerings like its Dynamic Product Ads and its AI-powered Community Intelligence solutions—an engine that powers insights derived from Reddit’s more than 22 billion posts and comments that provide structured intelligence for smarter marketing decisions.

Questions Remain About Reddit’s Ongoing Profitability and Valuation

Of course, seeing ChatGPT scale back its reliance on Reddit for response content raises concerns about the latter company’s role in the generative AI ecosystem moving forward. 

But co-founder and CEO Steve Huffman addressed this in July during the company’s earnings call, noting in his comments that every day, “nearly 50 million scrollers come to Reddit for their favorite communities and 60 million seekers land on Reddit in search of better answers to their questions.” 

Huffman added that “80% of users in a recent survey said they believe some questions can only be answered by humans as opposed to AI-generated summaries,” saying that for LLMs and AI search engines, the conversations that occur on Reddit and the knowledge they create are essential for AI training. 

More worrisome to shareholders and prospective investors should be Reddit’s valuation and profitability. The company has posted positive net income for four consecutive quarters, but it has yet to achieve full fiscal year profitability. Compounding those concerns, before Q3 2024, Reddit saw five out of six quarters end in the red. 

From a valuation perspective, there are some concerns, too. The company’s forward price-to-earnings (P/E) multiple of 62.50 is a dramatic improvement upon its trailing P/E multiple of 183.90. But a P/E of 62.50 is still enough to give some investors pause. 

Meanwhile, the company’s total liabilities increased more than 46% from 2023 to 2024, as EBITDA contracted a staggering 409% YOY. 

In spite of that, Reddit’s earnings are forecast to grow nearly 95% over the next year, from $1.12 per share to $2.18 per share.

What Wall Street Thinks About RDDT

Institutional ownership remains robust at more than 82%, with 571 institutional buyers easily outnumbering 168 institutional sellers over the past 12 months. That has resulted in inflows of $10.31 billion outnumbering outflows of $2.82 billion by a sizable margin. 

Short interest isn’t insignificant at 16.48% of the float, which has led to tempered forecasts from analysts, who give the stock a consensus Moderate Buy despite the average 12-month price target indicating a 3.77% potential downside. 

Still, Reddit’s projected earnings growth over the next year could offset any negative impacts from headline risk while the stock continues to work towards full-year profitability and a lower P/E ratio.

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