Key Points
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Reddit's advertising business has exploded.
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AI investors believe it has potential in data licensing.
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The company is embroiled in a standoff with Google over content licensing.
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Reddit (NYSE: RDDT) may be the most intriguing AI stock on the market.
Unlike semiconductors, software companies, or hyperscalers, Reddit derives its value in AI from its “corpus,” or the body of content on its site, which may be the most valuable source material for generative AI training and inference.
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The vast majority of Reddit’s revenue still comes from advertising, but its potential in data licensing has helped expand the stock’s valuation and attracted AI investors.
The social media company is due to report second-quarter earnings after the market closes on Thursday. Could the stock soar on the news? Let’s take a closer look at what to expect.
What to expect when Reddit reports
Reddit has delivered phenomenal results since going public in 2024, and its shares are up more than 400% since then. However, the stock has been volatile over the last year, and is actually down 20% year-to-date as it fell sharply in January alongside the broader software sell-off, though it’s much different from a traditional software-as-a-service (SaaS) company.
Additionally, its revenue growth has not dipped below 48% since it went public, and ad revenue growth has been driven by new ad tools and automated ad campaigns, interest in the platform in the AI era, and the high commercial intent of users, as many subreddits focus on product or experience purchases.
After Reddit reported 69% growth in the first quarter, analysts are expecting another strong round of results in Q2, calling for 46.3% top-line growth to $731 million, and for generally accepted accounting principles (GAAP) earnings to more than double from $0.45 to $0.97.
The biggest catalyst to watch
The biggest issue facing Reddit right now is its standoff with Google over data licensing. The two companies have been renegotiating their $60 million-a-year deal as Reddit is wary of Google scraping its site and then using that information to direct users to Google’s AI Overviews, rather than to Reddit’s site. Reddit reportedly wants a usage-based fee from Google, unsatisfied with the current agreement.
Reddit stock fell 9% in a single session last week after The Wall Street Journal reported that the company had considered cutting off Google’s access to its content as part of its negotiations, suggesting investors are fearful of any fallout.
Expect plenty of questions on theearnings callabout the relationship with Google, as Reddit could bring in significantly more cash if it secures usage-based fees or a similarly favorable deal from Google. Google’s shift to AI summaries has cannibalized traffic for media partners like Reddit, so the current system may be untenable.
Why the stock could pop
Digital advertising growth remains strong as Alphabet just reported 14% advertising growth in the second quarter. Reddit also has a history of lowballing guidance, meaning it could easily beat expectations in its second quarter. If it can do that, offer solid guidance, spin the Google news in a positive way, and signal more potential growth for the data licensing business, the stock could move significantly higher on Thursday.
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Jeremy Bowman has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Alphabet and Reddit. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.