Reddit's Data Licensing Revenue Grew 24% to $43 Million, With OpenAI and Google as Its Two Biggest Buyers. Here's Why That Number Is So Tiny.

Reddit (NYSE: RDDT) just reported its eighth consecutive quarter of revenue growth greater than 60%. But its data-licensing business remains a footnote on the income statement, accounting for only 5% of its $805 million in second-quarter revenue.

Data licensing sits inside "other revenue," which totaled $43 million in the second quarter, up 24% year over year. Still, advertising remains the company's fastest-growing and biggest long-term opportunity, and that's where management continues to focus its efforts.

Image source: Getty Images.

Google and OpenAI are Reddit's top licensing customers

Reddit is seeing interest from multiple parties that want to license its data, but Alphabet's Google and OpenAI are known to be its two largest data-licensing customers. They're using Reddit's data to train large language models and help computers generate more human-sounding responses.

At the same time, Reddit's data has value beyond AI training. As CEO Steve Huffman put it: "We do look at this as an expanding marketplace with lots of different opportunities."

Even if licensing is immaterial today, it highlights one of Reddit's biggest advantages. The company has a lot of valuable data from millions of people discussing various topics. Licensing this data is one way to make money, but digital advertising is where the real money is -- a market worth almost $1 trillion and growing.

Ad revenue growth is the priority

Reddit is still an advertising-first company, and that's where it's putting its energy. The key goal is to turn weekly active users (up 24% year over year to 514 million in Q2) into daily active users (up 18% to 130 million).

Management would like to reverse those growth rates because daily usage drives more ad impressions. The slower growth in daily actives underscores Reddit's reliance on search-driven traffic. Search referrals were choppy in the second quarter, potentially because more users are getting what they need from Google's AI-powered search summaries and never clicking through to Reddit.

Despite that headwind, ad revenue climbed 64% year over year to $762 million last quarter. It could be even stronger if more weekly users become daily users, helping Reddit generate more ad impressions.

Investors shouldn't overemphasize data-licensing growth. Reddit has been clear that licensing is a newer revenue stream with limited history, and the Google and OpenAI deals could shrink quickly if agreements aren't renewed.

That's why data licensing remains a side note. The main story is still advertising: driving growth in daily actives, increasing impressions, and lifting average revenue per user. Those are the levers most likely to move the stock over time, and those are the metrics investors should watch.

John Ballard 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.