Is the Reddit-ChatGPT Love Affair Over?

Core Insights - Reddit's stock (RDDT) has experienced significant volatility, with a 360% increase since its IPO on March 22, 2024, followed by a 61% correction earlier this year and a subsequent rebound of 144% [1][2] - Recent reports indicate that OpenAI's ChatGPT has drastically reduced its reliance on Reddit user-generated content, dropping from over 14% to around 2% of responses, which negatively impacted Reddit's stock [2][3] - Despite these challenges, Reddit's primary revenue source, online advertising, remains strong, with Q2 ad revenue reported at $465 million, an 84% increase year-over-year [5][6] Revenue and Partnerships - Reddit has entered into significant licensing agreements, including a $60 million per year deal with Google and a $70 million per year agreement with OpenAI, allowing access to its content for AI training [4][5] - The active advertiser count on Reddit has increased by 50% year-over-year, driven by new advertising solutions [6] Profitability and Valuation Concerns - Although Reddit has posted positive net income for four consecutive quarters, it has not yet achieved full fiscal year profitability, with five out of six quarters prior to Q3 2024 ending in losses [9] - The company's forward P/E ratio is 62.50, a significant improvement from its trailing P/E of 183.90, but still raises concerns among investors [10] - Total liabilities increased by over 46% from 2023 to 2024, while EBITDA contracted by 409% year-over-year [10] Future Outlook - Reddit's earnings are projected to grow nearly 95% over the next year, from $1.12 per share to $2.18 per share, which may help mitigate negative impacts from recent developments [11] - Institutional ownership remains strong at over 82%, with significant inflows of $10.31 billion compared to outflows of $2.82 billion [12] - Short interest stands at 16.48% of the float, leading to a consensus Moderate Buy rating among analysts, despite a potential downside indicated by the average price target [13]