CEO Steve Huffman Just Uttered 17 Words That Should Have Investors Truly Excited About Reddit's Role in the Artificial Intelligence (AI) Revolution

The large social and discussion platform Reddit (NYSE: RDDT) just reported incredibly strong first-quarter earnings. The company posted earnings per share of $1.01, which was $0.43 above Wall Street consensus estimates. Revenue of $663 million beat estimates by $52 million.

As of 12:05 p.m. ET, the stock had surged nearly 11.6%.

Revenue blasted nearly 70% higher year over year, while EPS jumped over sevenfold. The company has developed a rabid following, with 500 million weekly active users, 200 million of which are in the U.S.

Reddit also has nearly 127 million daily active users (DAU), of which about 23 million are in the U.S. Management's goal is to grow global DAU to 1 billion, with 100 million from the U.S.

Image source: Getty Images.

While Reddit may not be viewed as a company at the center of artificial intelligence (AI), CEO Steven Huffman just uttered 17 words during the company's earnings call that should have investors truly excited about its role and potential.

The 'oil for the modern internet'

Reddit is the ultimate example of a social media company that, for many years, focused on making the platform as authentic and organic as possible, without overemphasizing monetization.

People rely on Reddit for answers to unique questions that are hard to find anywhere else, often involving true human experiences to get the most accurate answers. The strategy worked, and every month, there are over 25 billion posts and comments on Reddit, which is the equivalent of Wikipedia's entire library of new content.

But this is also an incredible amount of data, which is a key ingredient for the large language models (LLMs) that power AI solutions, as put by Huffman:

Reddit's conversations are like oil for the modern internet, a foundational resources powering the next generation of technology.

It's clear that the hyperscalers have already realized this. OpenAI and Google have content licensing deals with Reddit, which grant customers the right to access Reddit content for a contractual period. The company's other revenue category, which includes these content licensing deals, increased 15% in the quarter from the prior year to $39 million.

One analyst on Reddit's earnings call also indicated that the deals with OpenAI and Google could be worth $50 million to $60 million per year. Furthermore, Reddit can grow its advertising revenue in a capital-light manner. The company only spent $1 million on capital expenditures in the first quarter.

"When you look across the more than 300 publicly traded tech companies, there's only one that combines this type of growth, profitability, and efficiency, and that's Reddit," Huffman said.

This should make investors excited, in my opinion, because Reddit can play a unique role in the AI ecosystem without requiring the company to spend hundreds of billions on capex, like the hyperscalers, to grow its advertising and content licensing revenues.

Now, I do think the AI licensing business is still very new, with all parties involved still trying to understand how important this content is to the AI models and how much it is worth.

It's hard to say right now exactly whether content licensing deals will get significantly more valuable, but I do think a stock like Reddit is an interesting way to play this aspect of the AI trade. The stock has been volatile, so investors may want to build their positions more gradually.

Bram Berkowitz has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Alphabet and Reddit. The Motley Fool has a disclosure policy.