On Friday, Citi maintained a Buy rating on Reddit (NYSE: RDDT) and increased the shares target to $70.00, up from the previous $53.00.
The adjustment follows Reddit's announcement of a new data licensing agreement with OpenAI, which was made public after the market closed on Thursday.
Although the specifics of the deal were not disclosed, it is believed to be similar to Reddit's existing three-year, $203 million data licensing agreement with Google (NASDAQ:GOOGL).
Reddit, a platform generating 1.2 million daily posts and 7.5 million daily comments, has amassed over 18 years of human-generated content, including more than 1 billion posts and 16 billion comments.
This extensive dataset is expected to grow in value, especially as large language models (LLMs) require continuous updates with fresh data.
The partnership with OpenAI is anticipated to provide ChatGPT with a substantial and constantly updated source of human conversation, which could significantly enhance the AI's capabilities.
The collaboration is not only expected to enhance ChatGPT's performance but also to benefit Reddit by integrating OpenAI's tools to improve its content moderation and translation features.
Citi estimates that the partnership could potentially contribute approximately $40 million annually to Reddit's revenue, with a considerable positive impact on the company's profitability.
The price target hike reflects Citi's optimism about the financial prospects of the Reddit-OpenAI agreement and the expected benefits to Reddit's bottom line.
The firm reiterates its Buy rating and underscores its confidence in Reddit's strategic move to leverage its vast data repository through partnerships with leading AI organizations like OpenAI.
InvestingPro Insights
Following Citi's optimistic outlook on Reddit (NYSE: RDDT), InvestingPro data and tips provide additional context for investors considering the stock. With a market capitalization of $9.22 billion, Reddit stands out with a striking gross profit margin of 87.35% in the last twelve months as of Q1 2024, underlining the company's efficiency in generating revenue compared to its cost of goods sold. This is particularly noteworthy as it aligns with the potential revenue boost from the OpenAI deal.
InvestingPro Tips highlight that Reddit holds more cash than debt, suggesting a solid balance sheet, and analysts expect net income and sales growth in the current year, which may be further supported by the new OpenAI partnership. Furthermore, the company's liquid assets exceed its short-term obligations, indicating a strong liquidity position. However, investors should note that Reddit is trading at a high revenue valuation multiple and a Price / Book multiple of 5.02, which suggests a premium market valuation.
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