Reddit’s Data Licensing Agreement with Google Under Scrutiny
Reddit, Inc. (NYSE:RDDT) is reportedly considering walking away from its $60 million-a-year data licensing agreement with Google (GOOGL) due to concerns over the impact of AI search on its traffic.
The Wall Street Journal reported on July 22 that Reddit has discussed ending Google’s access to its content for AI use as part of the renewal of their 2024 data-licensing agreement. This move would not only carry a significant financial cost but also affect the referral relationship between the two companies.
According to the report, Google sends people to Reddit, where their visits can be turned into advertising revenue. However, if AI answers already quote the useful part of a discussion, that referral relationship becomes less valuable. Reddit is essentially being asked to keep supplying an input that may reduce the traffic Alphabet Inc. (NASDAQ:GOOGL) sends back.
The $60 million payment is not large enough to make the decision on its own. In the first quarter, Reddit generated $663 million of revenue, of which $625 million came from advertising and $39 million from other sources, including data licensing. Google would lose a frequently updated source of human answers, while Reddit would find out how many users seek it out and how many arrive only because Google placed a link in front of them.
Hedge funds had shown considerable interest in Reddit, Inc. (NYSE:RDDT) before this dispute. Insider Monkey’s hedge fund database counted 70 hedge funds holding the stock as of March 31. Seventy holders is notable for a 2024 IPO, though the snapshot says nothing about trades made after the July report.
Short sellers are much more involved in RDDT than in Nvidia, Micron, or CrowdStrike, although CoreWeave’s 18.97% short float is higher. At the July 15 settlement, 16.99 million Reddit shares were sold short, equal to 12.34% of float and almost unchanged from the previous report. Four days of average volume would be required to cover them. The double-digit percentage is consistent with persistent doubts about valuation and Reddit’s dependence on outside platforms. Its near-flat reading does not show shorts newly piling in because of the Google talks. It could still amplify a rally if the companies renew on terms that ease the traffic concern.
While we acknowledge the risk and potential of GOOGL and RDDT as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns and doing so within a shorter time frame.
Impact of AI Search on Reddit’s Traffic
AI search has been a game-changer in the tech industry, and its impact on Reddit’s traffic cannot be overstated. The company’s discussions and conversations are a key differentiator, as they provide human answers that polished corporate pages cannot match. However, if Google’s AI search becomes too effective, it may reduce the number of users who visit Reddit directly, affecting its advertising revenue.
Reddit’s Financials and Google’s AI Search
Reddit’s financials are a significant factor in this dispute. The company generated $663 million of revenue in the first quarter, with $625 million coming from advertising and $39 million from other sources, including data licensing. If Reddit walks away from the agreement, it would not only lose the $60 million-a-year payment but also the potential revenue from advertising and data licensing.
Google’s AI search is also a crucial factor in this dispute. The company’s AI-powered search engine is designed to provide accurate and relevant answers to users’ queries. However, if Reddit’s discussions and conversations are too effective, it may reduce the number of users who visit Google’s search engine directly, affecting its advertising revenue.
Conclusion
The dispute between Reddit and Google over AI search is a complex issue with significant financial implications. While Reddit’s decision to walk away from the agreement may seem drastic, it is a necessary step to protect its business model and revenue streams. The outcome of this dispute will have a significant impact on the tech industry, and it remains to be seen how the two companies will resolve their differences.
