Reddit’s OpenAI Partnership Brings a Fresh New Upside

Key Points

• Despite its recent arrival on the stock market, Reddit stock is quickly becoming one of the hottest technology stocks.
• All of the company's KPIs run on all cylinders, pushing analysts to give the stock double-digit upside potential.
• Management had one trick up its sleeve, announcing a partnership deal with Elon Musk's OpenAI.

After reporting its first-ever set of financials after the company’s initial public offering (IPO), shares of Reddit Inc. NYSE: RDDT are now trading above their 52-week high. Most of the bullish price action came right after the first quarter of 2024 earnings announcement. While some investors have a hard time trusting newer companies, there are good reasons why this technology stock is a potentially great fit.

Not only is Reddit exposed to double-digit compounded average growth rates (CARG) in virtually all of its key performance indicators (KPIs), but the company also has access to data, tons and tons of data. What is now called the oil of the 21st century, data allows Reddit to monetize its user base like never before.

It is far-fetched to think Reddit could become the next Twitter (now X) or even come close to the margins and return on invested capital (ROIC) rates of Meta Platforms Inc. NASDAQ: META. However, investors can see how Reddit is making a case for higher prices and becoming more robust by the day, giving it enough merit in its niche.

Trying to Keep Up is Reddit’s Forte

While there isn’t much information out there, given the company’s recent arrival to the stock market, investors can find some critical information inside the Securities and Exchange Commission’s ‘Bam’ site. This is where those savvy enough find company prospectuses before they go public. 

Inside this pre-IPO brochure for Reddit, investors can get a glimpse (for free) into what probably took days for management to put together; here are a few essential pointers to save time:

1. 32% of Reddit users reported not being active on Facebook, and 37% said they were not active on Instagram. That’s already a good chunk of contrarian social media users who chose Reddit instead of the most popular ones, and there’s value there.
2. 48.5% of Reddit’s traffic came from the U.S. (as of December 2023), meaning that the platform still has a large open field ahead of it to capture – and monetize – an international audience.
3. Average revenue per user (ARPU) shows a three-year CAGR of 12.4%, while ex-U.S. ARPU was a third of the total average; it did grow at 17.5% instead. This relationship crystallizes the fact that Reddit could keep expanding into new markets.

These are some reasons why the markets like Reddit’s growth story; it’s a fresh perspective from what they are used to seeing in Meta and even Alphabet Inc. NASDAQ: GOOGL and its YouTube platform. 

Feeling comfortable believing that Reddit could still push double-digit growth rates in the coming months, markets have bid up the stock to trade at 9.2x price-to-sales (P/S). Stocks typically trade at these types of premiums when markets expect above-average growth or quality from the company’s sales.

One Ace up Reddit’s Sleeve

Recently, as if management was waiting for the hot quarterly release to settle into the stock price, Reddit announced a new partnership with Elon Musk’s OpenAI, showing investors just how important Reddit’s endless stream of data is to the advancement of artificial intelligence.

A 15% rally upon the announcement was the market’s way of letting everyone know they were okay with this addition. By combining Reddit’s data with ChatGPT capabilities, management seeks to enhance user experience and be able to monetize A.I. licensing agreements through developers and other entities. 

As early as last week, analysts at Citigroup felt good enough about their projections, using what little past data they could compile and relying heavily on assumptions. It seems that Reddit’s future was clear enough for them to slap a $70 valuation on the stock.

The stock must rally by 18% from its current level to prove these assumptions right. These same analysts think that the company could report more than 100% earnings per share (EPS) growth in the next 24 months, making this valuation all the more likely to be realized.

Markets placed another vote of confidence on Reddit stock by bidding up the forward P/E ratio to be at the top of the mid-capitalization technology sector. The ultimate premium is another way of saying these projections aren’t too far from reality.