On Thursday, Deutsche Bank raised its price target for Reddit (NYSE: RDDT) shares to $65 from $62, maintaining a Buy rating on the stock. The adjustment follows Reddit's announcement of a new partnership with OpenAI.
The deal includes licensing Reddit's data to OpenAI and integrating Reddit content into ChatGPT and other OpenAI products.
Although the financial terms of the agreement were not made public, the collaboration enables Reddit to develop AI-powered features using OpenAI's AI models, and it also establishes OpenAI as an advertising partner for Reddit.
The analyst from Deutsche Bank noted that the deal's value might have been discounted due to the additional benefits Reddit gains, similar to a previous agreement with Google (NASDAQ:GOOGL).
If the financial terms are comparable to the Google arrangement, the analyst estimates that the deal could contribute approximately $54 million to Reddit's annual EBITDA, based on the assumption of 90% incremental margins.
The recent agreement with OpenAI arrived sooner than Deutsche Bank had forecasted. With two large language model (LLM) deals already secured, the analyst believes it is feasible for Reddit to sign two more, resulting in a total of four LLM collaborations.
These additional deals could potentially add $108 million to Reddit's annual EBITDA, which would represent a 57% increase over the firm's current FY25 EBITDA projection of $190 million.
Looking further ahead, if Reddit manages to secure LLM agreements with six major players, the analyst sees a pathway to $360 million in annual revenue. This could yield $324 million in annual EBITDA, significantly bolstering the company's financial outlook and justifying the raised price target on the shares.
InvestingPro Insights
As Reddit (NYSE: RDDT) forges ahead with its new partnership with OpenAI, it's worth noting that the company's financial health and market performance also present a compelling story. According to InvestingPro data, Reddit boasts a substantial market cap of $9.22 billion, reflecting investor confidence in its potential. The platform's revenue growth is particularly noteworthy, with an impressive 29.08% increase over the last twelve months as of Q1 2024, and an even more remarkable quarterly revenue growth of 48.38% for Q1 2024. These figures underscore the company's capacity for rapid expansion, aligning with the optimism around its AI-driven initiatives.
Furthermore, Reddit's gross profit margin stands at a robust 87.35%, highlighting efficient operations and strong control over costs relative to its revenue. This metric is especially relevant as the company continues to invest in AI technology, which could drive further efficiencies and profitability. Despite not being profitable over the last twelve months, analysts are optimistic, predicting profitability for the current year, as indicated by the InvestingPro Tips. This optimism is supported by Reddit's impressive gross profit margins and the expectation that net income will grow this year.
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