Meet the artificial intelligence (AI) stock that's up 124% so far this year and that virtually no one is talking about

At the beginning of the year, social media platform and information forum Reddit (RDDT 12.42%) has completed an initial public offering (IPO). Like many newly launched publicly traded companies, Reddit's stock saw an initial rise in price, but that quickly fell off as some investors became skeptical of the company's growth prospects. Reddit made a particular case for ties to artificial intelligence (AI), but failed to convince stock buyers. The company noted how its user data could be used to help large technology companies train information workloads and large language models (LLMs).

This idea seemed more sensible in theory than in reality and I had some doubts about whether Reddit could execute in this particular business segment. But after the company's recently released third-quarter earnings report, I'm changing my mind.

Let's look at how Reddit is entering a new and exciting phase of growth and assess whether now is a good time to pick up shares.

How Reddit proved me wrong

Shortly after Reddit's IPO in mid-March 2024, I expressed serious doubts about the company's ability to grow its core advertising business and capitalize on its AI activities. At the time, Reddit's value proposition was weak in the face of much larger competitors such as B. difficult to sell Metaplatforms And alphabet dominate the internet.

However, Reddit's third-quarter earnings showed some surprisingly good metrics. Revenue rose an impressive 68% year over year to $348.4 million. Even better: Both the free cash flow and the net profit of the young company were positive values. In the third quarter of 2023, Reddit reported a monetary loss.

How did Reddit manage to drive this increase in revenue while generating positive unit economics in such a short period of time? Two levers are currently having a positive impact on the company.

First, Reddit's daily active uniques (a proxy for active users) increased 47% year over year to 97.2 million. In general, more users lead to higher engagement on social platforms. When this happens, advertisers will want to expand the number of users who see their ads so that Reddit can monetize its user base more effectively.

Even better, Reddit's average revenue per user (ARPU) is growing by similar percentages both in the US and abroad. To me, this suggests that advertisers on a global scale are using Reddit's platform – meaning the company is enjoying growing brand appeal in many different geographic regions.

In addition to advertising revenue increasing 56% year-over-year, data licensing revenue also increased a whopping 547%. Simply put: I was wrong about Reddit's AI plan. Here's why.

What could AI mean for Reddit in the long term?

Although Reddit's data licensing revenue increased fivefold year-over-year, revenue in the segment was just $33.2 million in the third quarter. Additionally, data licensing revenue for the nine-month period ending September 30 totaled $81.6 million – or just 9% of Reddit's total revenue.

While data licensing for Reddit is still somewhat slim, I now see this opportunity in a whole new light. Check out the table below with Reddit's remaining performance obligations (RPO) for data license agreements.

Data source: Reddit.

In less than a year, Reddit has expanded its data licensing agreements by tens of millions of dollars. Additionally, because these are multi-year contracts, the company will realize these sales over time – providing some level of predictable growth for this new AI company.

To me, the AI ​​opportunity for Reddit is very real and the RPO trends shown above reinforce this idea. While data licensing is already a business worth hundreds of millions of dollars, Reddit has a lucrative opportunity to expand this operation in meaningful ways as data becomes even more important for training LLMs and generative AI protocols.

Is Reddit stock a buy right now?

I tried to compare Reddit to other social media and data-intensive companies using forward price-to-earnings (P/E) ratios.

RDDT PE Ratio (Forward) data from YCharts

There are some pretty interesting insights to be drawn from the trends pictured above. First, both Meta and Alphabet trade at significantly lower multiples compared to Reddit and others Spotify technology. One reason for this could be that Meta and Alphabet compete in much denser areas involving AI – from social media to virtual reality, cloud computing, workplace productivity, gaming and more.

Additionally, it is pretty obvious that both Reddit and Spotify have seen some valuation growth in recent periods. At Spotify, I think a lot of the momentum is rooted in the idea that streaming platforms will become a more important megaphone and distribution channel for diverse opportunities in the future.

For example, podcasting platforms have been a go-to platform for both presidential campaigns this year. I expect Spotify and competing platforms to experience additional tailwind as streaming becomes an increasingly widespread form of communication alongside traditional broadcasting.

As for Reddit, it's pretty clear that the company's valuation has skyrocketed following its underwhelming third-quarter report. Although Reddit stock is therefore quite expensive, I wouldn't discount the company's growth potential. For me, Reddit is still an overlooked opportunity at the intersection of data and AI – making it a tempting buy at a cheaper price.