We recently looked at the rise of AI and how it will shape our future. And in our latest podcast episode we spoke to futurist author Bernard Marr about what could be next for AI and the opportunities on offer.
With AI dominating the news cycle, here’s a closer look at three businesses in different sectors that could benefit from this evolving technology.
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Darktrace
Darktrace is a relatively new entrant to the public markets and was born with AI at the core of its model. It harnesses these technologies to help businesses battle cybersecurity threats.
Having robust cyber security is no longer a nice to have, it’s become an essential service for most businesses. It’s already a $200bn market and we think demand is only likely to increase. Not surprisingly, management agrees. Full-year annual recurring revenue is expected to grow by around 30%. But tricky macroeconomic conditions mean there are some short-term headwinds to new customer additions.
The underlying product is a self-learning AI platform that can detect and respond to threats in real time. 99% of revenue is subscription based. So, unless something goes wrong, it’s a sticky revenue stream.
The end goal is to have customers take on multiple products, and trends are moving in the right direction – just under half of its customers are paying for four or more products.
We like the industry, and the product is leveraging new technologies with plenty of scope for growth. This is a relatively young business, with a valuation that’s relying on growth. However, profits are likely to remain slim while the business scales. That adds risk.
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Nvidia
It would be hard to exclude Nvidia, arguably the most high-profile benefactor of the recent AI craze. Shares have more than doubled in 2023 so far.
Of course, there's no guarantee that continues as past performance isn’t a guide to future returns.
Let’s look at why markets are excited.
Nvidia has long been a leading player in the chip business, traditionally making graphics cards used for gaming. But the AI revolution has revealed a new use, and it's much more lucrative. Amped-up versions of its chips are essential for powering AI and machine learning systems. ChatGPT is a popular example, which runs on Nvidia chips.
The beauty of demand for AI tasks is that these chips are 10 to 20 times more expensive than those sold for more traditional tasks like playing PC games. Giants like Amazon, Microsoft, and Meta are all using Nvidia's latest chips to power their AI infrastructure.
The real driver of optimism is how much of a lead Nvidia has over rivals, some analysts expect it'll have a 90% share of this part of the market in 2024.
The elephant in the room is the valuation, which sits well ahead of its long-term average at 48 times forecast earnings. Nvidia looks well placed to benefit from the AI trend, but at this valuation, it it’s likely to be a bumpy ride.
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RELX
In today's data-driven world, companies that provide essential data solutions hold a significant competitive advantage. RELX offers just that and is an essential partner to lots of industries, including finance, insurance, law, and academia.
AI, then, seems like a perfect fit for a business like this – and it is. For RELX, the use of this technology isn't particularly novel. It's been incorporated for some time. But tapping into the real benefits of AI, as it becomes more powerful, depends on the underlying data at its disposal. That's where RELX has a real advantage.
Huge proprietary data sets, built with public and internal sources, are extremely valuable. That's one of the reasons it can offer cutting-edge products. We see this as a driving force moving forward as AI and machine learning continue to evolve.
More broadly, earnings and cash flow quality are key attractions. Along with relatively stable revenue streams, with a high proportion generated by recurring subscription models.
These strengths haven't gone unnoticed though. The valuation is ahead of its longer-term average at 21 times forecast earnings and that adds extra pressure to keep delivering.
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Unless otherwise stated, estimates, are a consensus of analyst forecasts provided by Refinitiv. These estimates aren’t a reliable indicator of future performance. Investments rise and fall in value so investors could make a loss.
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