Reddit Is Still Way Overpriced

24/7 Insights

• Artificial intelligence exuberance has gripped the stock market.
• A deal with OpenAI boosted Reddit’s already overvalued stock.

Reddit Inc. (NYSE: RDDT) stock surged over 10% on news that it has cut a deal with OpenAI. The details regarding how the arrangement would help Reddit’s revenue were thin, so the jump in shares that were already overvalued did not make sense. Reddit’s stock has gone through a series of wild swings.

The company announced that OpenAI would bring Reddit content to ChatGPT. Reddit users can use “AI-powered features.” OpenAI will become a Reddit advertising “partner.”

Reddit is not the first stock to surge because of an artificial intelligence announcement, and it will not be the last. AI fever has been part of the stock market for several months.

Reddit is almost two decades old but is an immature public company. It has just over 80 million daily active users, which is small compared to most social media businesses. Facebook has 2.1 billion.

Reddit still has to prove that it can make money and has a long-term future beyond what it is today. Revenue in the most recent quarter rose 48% to a tiny $243 million year over year, and it lost $575 million in the quarter. It had an adjusted EBITDA of $10 million. It made an unimpressive forecast for the current quarter: Revenue could be as low as $240 million, and adjusted EBITDA could be zero.

AI exuberance has gripped the market. Reddit made no case that the OpenAI deal has concrete value. The stock should not have risen at all.

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