You probably know Reddit (NYSE:RDDT) as a social-media platform. Furthermore, in the wake of a recently established partnership, Reddit has a notable artificial intelligence angle. However, after looking at the company’s bottom-line financial facts, investors shouldn’t load up on Reddit stock until they see some improvement.
Remember, Reddit just went public in March of this year. The company priced its initial public offering at $34 per share, and the stock’s price is already much higher than that. So, this is a time for caution and due diligence, not hype and hope.
Reddit CEO Touts ChatGPT Deal
It seems like every technology firm has to enter into at least one generative-AI deal nowadays. Otherwise, the shareholders might abandon the company.
Reddit is no exception to this rule, as the company recently entered into an agreement with ChatGPT gen-AI chatbot developer OpenAI.
Per the agreement, Reddit will provide its content to the ChatGPT chatbot, and OpenAI will be an advertising partner for Reddit. Moreover, Reddit’s moderators and users will have access to certain AI-enhanced features.
As you might expect, Reddit CEO Steve Huffman emphatically touted the partnership.
He declared that including Reddit’s data “in ChatGPT upholds our belief in a connected internet, helps people find more of what they’re looking for, and helps new audiences find community on Reddit.”
Sure, it’s Huffman’s job to drum up interest and publicity in a high-profile deal like this. Should investors be ultra-enthusiastic about Reddit right now, though?
Look for More Data Before Investing in Reddit
A major issue with the Reddit-OpenAI agreement is that the financial details of the deal are, as of this writing, still undisclosed.
It’s awfully hard to assess whether the deal is value-added or not if we don’t know what it’s worth in dollar terms.
Yet, the market seems to be operating under the assumption that Reddit will benefit massively from the OpenAI partnership. Indeed, Reddit stock jumped more than 10% when the market caught wind of the deal with OpenAI.
Hopefully, more financial details will come to light in regard to that agreement. And speaking of financial details, prudent investors should wait for compelling evidence that Reddit can narrow its profitability gap.
Huffman once bragged that Reddit is “really good at finding the good content from a sea of noise.” That’s all fine and well, but is Reddit “really good at” turning its sales into profits? The answer is “probably not.”
Reddit generated first-quarter 2024 revenue of $243 million but still incurred a net earnings loss of $575.1 million.
Even if we make adjustments for $595.5 million worth of stock-based compensation expenses and related taxes, Reddit’s first-quarter income was relatively small. That’s worrisome, as Reddit has a market capitalization that exceeds $10 billion.
Reddit Stock: Not the Best AI Play for 2024
Reddit is a social media business with an AI angle, and Huffman is clearly optimistic about Reddit’s arrangement with OpenAI. However, we don’t know the financial details of the Reddit-OpenAI deal. Consequently, it’s difficult to assess the value of this arrangement.
Reddit still needs to show that it can leverage the company’s advertising sales into substantial profits. Thus, there’s an information gap that Reddit needs to fill in the coming quarters.
Therefore, it’s wise to watch from the sidelines and steer clear of Reddit stock for the time being.
On the date of publication, David Moadel did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
