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As investor excitement about the potential profits from artificial intelligence (AI) has reached fever pitch this year, Questor has remained wary. In June, this column cautioned over the soaring shares of companies linked to AI that had led to some becoming grossly overvalued.
But while an AI bubble remains a growing risk, the technology does have the potential to improve the efficiency, productivity and profitability of businesses which use it wisely. For investors, the challenge is to find companies that could benefit significantly from AI but whose shares have not been caught up in the stock market fervour.
Questor believes it has identified one such company in Relx, an analytics specialist which provides data to businesses, healthcare professionals and governments. First tipped as a buy in this column in February 2018, the shares have risen 70pc since, outperforming the FTSE 100 by 69 percentage points.
AI has the potential to enhance Relx’s analysis of the vast pools of high-quality data it controls yet its shares, while not cheap at 22 times forecast earnings, have not been swept up in the hype over the technology.
Questor is not alone in this view. Some of the world’s best-performing fund managers are invested in Relx, according to financial publisher Citywire. The Citywire Elite Companies website rates companies based on their backing by the top-performing 5pc of equity fund managers from its database of more than 10,000 across the world. Relx, which counts 14 of these investors as backers, has secured its top AAA rating.
Alistair Wittet, who holds Relx in his Comgest Growth Europe Compounders fund, is one of these top fund managers and is eyeing AI’s potential benefits. “Advances in AI will be an opportunity for Relx to potentially further enhance the value of its datasets with better analysis,” he says.
Relx has been using AI techniques, such as machine learning and natural language processing, for more than a decade. However, the new opportunity lies in generative AI, the type of technology which, like digital chatbot ChatGPT, can create content itself.
Relx is already trialling its first product to use this technology, Lexis+ AI, an enhanced version of its legal data tool that can summarise and draft legal documents. It is working on similar projects across other areas of its business.
Mr Wittet argues that what will separate Relx’s AI offerings from those of rivals is the quality of the data powering it. “If executed well, Relx has the opportunity to leverage its strong brand reputation and clean datasets to provide value-added AI solutions to its customers,” he says.
Mr Wittet cites Relx’s fastest-growing risk division, which provides decision tools to businesses to manage risks such as fraud and cyberattacks, as an example. “Given the vast majority of the data in the risk business is proprietary and contributory, we believe it will be very difficult for an external AI to replicate what Relx does.”
Relx’s record of navigating periods of technological change bodes well for its potential to profit from AI. Formerly known as Reed Elsevier, Relx has made the transition from publishing to data analytics and, before that, print to digital publishing. It has gone from generating 22pc of sales from digital products in 2000 to 83pc last year.
Only 6pc of 2022’s sales came from print with the remaining 11pc from its exhibitions business. The move into digital publishing meanwhile opened up the opportunity to deliver the data analytics that are powering growth today.
Last month’s half-year results showed continued growth, with revenues up 8pc and adjusted operating profit 16pc higher. Adjusted operating margin reached 33pc, highlighting the prices Relx’s customers are willing to pay for its high-quality data. That built on a strong 2022 when revenues surpassed pre-pandemic highs, due in part to a recovery of its exhibitions business, which was hit hard by lockdowns in the previous two years.
Investment in new technologies such as AI does not come cheap, with Relx’s annual technology spend reaching around $1.6bn (£1.3bn), but management is aiming to keep cost increases below revenue growth, meaning margins should continue to rise.
This AI opportunity, coupled with Relx’s focus on its higher-growth analytics and decision tools products, means there should be plenty still to come from the shares. Buy.
Questor says: buy
Ticker: REL
Share price at close: £25.72
Algy Hall is investment editor of Citywire Elite Companies, which rates companies based on their backing by the world’s best fund managers
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