Advertising has been the cornerstone of Reddit's (RDDT, Financial) revenue, making up approximately 98% of its total income. However, the social media giant is now pivoting towards maximizing the potential of its vast data reserves. A recent development in this direction is its collaboration with Microsoft-backed OpenAI (MSFT, Financial), where Reddit's content will be integrated into ChatGPT. This partnership will also introduce AI-enhanced features for Reddit users and moderators, alongside ad placements by OpenAI on Reddit.
While financial specifics of the deal remain under wraps, Reddit's existing data licensing agreement with Alphabet (GOOG, Financial) serves as an indicator. Alphabet currently pays $60 million to access Reddit data to enhance its AI models, including the Gemini chatbot. This move underscores the growing value of human-generated content in an increasingly automated online environment.
Reddit's first-quarter earnings post-IPO on May 7 showcased a significant uptick in "other revenue," primarily from data licensing, which surged 450% year-over-year to $20 million. In contrast, advertising revenue grew by 39% to $223 million. Despite potential future challenges in advertising due to inflation and geopolitical uncertainties, Reddit's overall revenue growth accelerated to 48%, marking its fastest pace since the first quarter of 2022.
The strategic alliance with OpenAI marks a crucial expansion of Reddit's data licensing sector, which is poised to become a key revenue stream. As Reddit advances, securing more data licensing deals will be essential to justify its over $10 billion market cap and support its valuation metrics, especially as it strives for profitability on a GAAP net income basis.
