3 perceived AI-losers that aren’t

It seems many investors feel the future efficiency wonders of AI, measured in trillions of dollars of additional market value accruing to the AI winners, must come at the expense of other businesses, the losers.

The prevailing thinking is that AI will automate many business processes and shrink white-collar workforces, to the detriment of companies providing software or services to other businesses. AI is also expected to easily extract data from the internet, thereby devaluing businesses for whom data is at their core.

While we expect that many businesses will indeed become less relevant as AI is more broadly adopted, some businesses in the AI loser bucket don’t belong there. Three examples of this are Accenture, Compass Group and RELX.

Accenture is the global leader in IT outsourcing and consulting services. It helps the world’s largest organisations manage change and improve their efficiency. Its earnings grew about 10% in the last year, yet its share price declined 20%. Its PE multiple has declined from 30x a year ago to 20x today, a valuation it’s been at only twice in the last 9 years.

Accenture is a misperceived AI loser. 

Large organisations are complex and will need help to benefit from AI. 

This may involve moving their IT infrastructure to the cloud, modernising systems, improving cyber security, and changing business practices. This is what Accenture is good at.

In Australia, Accenture has won large contracts with Telstra, Westpac and NAB, among others, where AI is at the core of the relationship. In August Accenture signed a major deal with Qatar Airways which will involve using AI to improve everything from flight scheduling to predictive aircraft maintenance.

Compass Group is the world’s largest contract catering business. It runs catering for the Australian Open, the Sydney Opera House, all of Google’s campuses globally, and thousands of other client sites. 

Compass keeps its clients on average for over 25 years. 

Its earnings grew 11% over the last year yet its share price declined 11%.

Some investors fear that AI will result in shrinking workforces, which in turn would mean fewer people eating at Compass’ corporate cafeterias. We believe this is unlikely. Compass is a broad business, with corporate dining accounting for well under half of its revenue. It also serves a variety of schools and universities, hospitals and aged care facilities, sporting events, mining sites, and government and defence agencies.

Also, the most significant driver of Compass’ growth is outsourcing by organisations who recognise running cafeterias is not their core business and is best done by a specialist. Over one-third of the global catering market still has the potential to be outsourced. Compass is a misperceived AI loser.

RELX is one of the world’s largest and most interesting data and analytics businesses. It provides solutions that are essential to the daily work of lawyers, academics, medical practitioners, and insurance underwriters globally. Its earnings grew by about 10% last year yet its share price declined 20%.

Some investors fear AI will extract data from the internet, thereby displacing the services RELX provides. We believe these concerns are misplaced.

The data at the core of RELX’s solutions is proprietary and not available to AI models. 

For example, auto insurers in the US provide RELX with details of every policy holder, every vehicle and every accident claim, from which RELX supplies its insurance customers with data that helps them make better underwriting and claims decisions.

Rather than undermining the value of its solutions, technology enhances them, including AI. In its Legal business, RELX last year released LexisNexis Protégé, a purpose-built AI assistant for legal work. It helps lawyers by analysing content within a secure environment, drafting documents in the lawyer’s own style, and searching both RELX’s proprietary legal database and the client’s own data. The growth of RELX’s Legal business has been accelerating as more clients adopt and use its premium AI solutions.

Accenture, Compass Group and RELX are three businesses priced by the market as AI losers where we feel the evidence is much more positive, and which present unusually attractive investment opportunities.