Reddit shares surge after social media group strikes content deal with OpenAI

Investing.com -- Shares in Reddit surged in premarket U.S. trading on Friday after the social media platform announced a new content partnership with OpenAI. 

Under the agreement, OpenAI will gain access to content on Reddit's website, while Reddit will incorporate new AI features for users and mods, the companies said on Thursday. The two will also collaborate on advertising.

Reddit’s shares surged by more than 13% in premarket trading.  

Thursday's announcement comes as OpenAI is moving to strike deals with media groups in a bid to help train its powerful AI model with data from sources that are widely viewed as reliable. OpenAI, which is backed by tech giant Microsoft (NASDAQ:MSFT), is also facing legal action from some publishers who have claimed that content generated by the firm infringes on their copyrights.

Reddit has previously partnered with Alphabet Inc's (NASDAQ:GOOGL) Google, under which the latter also gained access to the social network’s data for its AI products. 

"Big picture, like the [Google] relationship, this contract again highlights the value of [Reddit]’s unique corpus of data in the [generative artificial intelligence] world," analysts at Morgan Stanley said in a note to clients.

Although the financial details of the deal were not disclosed, analysts at JMP said that it will likely be "smaller than the Google" agreement, which totaled $203 million over three years.

Reddit, which went public earlier this year, surprised investors with stronger-than-expected first quarter earnings, as it benefited from its AI tie-ups and advertising deals. 

In recent years, the site has become known as a medium for discussion and an archive of information on the internet. The meme stock phenomenon of 2021 played a key role in Reddit’s booming popularity, given that the retail frenzy that drove up the prices of GameStop Corp (NYSE:GME) and AMC Entertainment Holdings Inc (NYSE:AMC) largely originated on Reddit’s r/wallstreetbets forum.

Several analysts have also noted the value Reddit’s data has in potentially training AI models. 

The Morgan Stanley analysts said that the OpenAI partnership represents a "key step forward" in Reddit's push to expand its data licensing business, adding that the deal will likely rake in $40 million to $50 million in "high margin annual revenue."

"[W]e would expect a partial impact to [Reddit] revenue/[earnings before interest, tax, depreciation and amortization] in [the second quarter], with the first full quarter impact coming in [the third quarter]," the Morgan Stanley analysts said.

Ambar Warrick contributed to this report.