4 stocks to buy beyond the AI obvious

In order to find companies that are doing the latter, I spoke with Aoris Investment Management Managing Director and CIO Stephen Arnold and Nanuk Asset Management CIO Tom King.

“There are a lot of businesses where they feel like they've got to tell investors they are doing a tonne of stuff with AI. A lot of it's probably cosmetic and they're probably overselling what they're really doing,” Arnold says.

The key, he explains, is looking for companies that have invested into foundational technology systems, which creates a good starting point on which to add these new processes and tools.

It’s also an area that Nanuk has been increasing their focus on over the last 12 months, King says, looking to companies that are involved in “enterprise scale deployment of generative AI”.

This includes software platforms, technology services firms, and certification and compliance companies, as well as companies further downstream with “proprietary datasets that can be leveraged with AI to provide additional value for clients and revenue for the companies themselves”.

Stephen Arnold, Aoris Investment Management

RELX (NYSE: RELX)

The UK-based provider of data, analytic and decision tools is uniquely positioned to apply generative AI across its proprietary information sets, with Arnold particularly interested in the legal market.

“This is where the equity market has concerns at the moment that AI might be a headwind to RELX’s business. Where RELX plays in the legal market is proprietary case law content,” he says.

“It literally has 200 billion documents of case law data that legal practitioners need in litigation so that they know that they're using authoritative, up-to-date legal content. RELX has an AI tool which they've been progressively enriching over the last one or two years called Protégé, and that adds a lot of value to their case law content.”

This gives RELX a material advantage over its competitors and provides something that other AI tools simply can’t replicate because they don’t have access to the same data. It also has the foundation of tech investment that Arnold notes is so valuable as a starting point.

“They've had these tools in the market for a couple of years and have become increasingly sophisticated. We're encouraged by what we see in the accelerating revenue growth from that part of RELX's business,” he adds.

“There are other AI native tools that are targeting different parts of legal practitioners’ operations. There will be some areas where those new AI tools and RELX kind of rub shoulders and compete for the same opportunities. But I think at their core, they're going after different applications and RELX starts with a different and strong advantage in its proprietary case law content.”

The risk in the investment case is that even with these advantages, there is a chance that a competitor enters the market and eats RELX’s lunch.

“The new AI native competitors can conceivably target some of the same opportunities RELX is going after,” Arnold says.

“Interestingly, much of the markets concern relates to RELX’s legal business, even though it’s now the company’s fastest-growing division and accelerated its organic revenue growth over the last five years from 2–3% to 9%. The evidence to date suggests AI is helping RELX more than hurting it.”

InterContinental Hotels Group (LON: IHG)

How is a hotel group utilising AI tools to make a real difference in its business? Guest acquisition, commercial operations, and efficiency. For Arnold, it’s the guest acquisition side that is most important.

“IHG is partnered with Google, and it's helping to make the content on the hotel websites more discoverable for AI tools like ChatGPT. The hotel websites are also being enabled for a conversational chat,” he explains.

“On the IHG website, an IHG member will be able to engage with the platform, and the AI tools will help the customer to find a hotel in the right location with the attributes that the individual is looking for. The AI tools will also enable a content translation of a hotel's website into multiple languages.”

IHG is another company that meets Arnold’s criteria of having a long history investing in its technology infrastructure, which he says is much more modern than many of their peers.

This leaves them in the enviable position of being set up to take advantage of AI tools that large competitors might struggle to integrate, while small competitors may not have the scale to invest in the tools.

“A core part of our thesis for owning IHG is that there will be an ongoing shift in the global hotel market, away from independent and small regional groups of hotels in favour of the large global groups of which IHG is one,” Arnold says.

“One of the drivers of that is the ability of the large groups to invest in the underlying technology, including reservation systems, yield management systems, web content, and also the AI tools, where it's just really not possible for the independent hotels to have an investment spend that allows them to keep up.”

In terms of risks, he notes that there is a chance that the AI focus ends up being a distraction and taking effort away from other areas of the business.

“They put a lot of effort into AI, and you can't do everything at once, and possibly it comes at the expense of time and focus on other areas of their business that also need investment.”

Tom King, Nanuk Asset Management

ServiceNow (NYSE: NOW)

Software company ServiceNow supplies cloud-based solutions for digital workflows. As with many tech firms, the company is facing headwinds from new AI competitors. The reason King is bullish on its future is down to structural advantages and its own AI focus.

“ServiceNow is repositioning itself to make AI an opportunity for its next leg of growth, as an orchestration layer or the 'system of action' that orchestrates AI agents both its own as well as hosting third party agents,” he says.

King explains that its strategy encompasses three facets:

• NowAssist, which is the more classic agentic AI function, embedding AI into its existing workflow such as summarising incidents, cases and service, drafting resolution notes, generating code and flows for developers and chat functions for employees and customers.
• Autonomous AI agents that execute processes developed by ServiceNow.
• AI Control Tower, the central governance layer that ServiceNow has developed to monitor, evaluate and govern agents across the enterprise, including third party agents.

“ServiceNow is structurally advantaged given its ownership of enterprise workflow data, which positions the company as the operational backbone of large enterprises that AI natives cannot easily replicate,” King says.

“Its positioning in an enterprise software stack as a 'system of action' means that it can orchestrate agents from an operational perspective, which gives ServiceNow agents an advantage over competitors that are application layers such as Salesforce and Workday.”

So, where could the investment thesis go wrong? Much like RELX, AI native competitors are already attempting to eat into ServiceNow’s market share.

“Serval is one AI native that is directly aimed at ServiceNow's core. Serval is marketing itself as a full replacement of a customer's existing system or as an 'AI layer' on top of existing services,” King says.

“The incumbent moat that ServiceNow has is their depth of accumulated workflow logic over the last 20 years+ supported by its installed base (85% of Fortune 500 companies run ServiceNow) and switching costs.”

Veeva Systems (NYSE: VEEV)

Another software firm at danger of AI disruption is Veeva Systems, with the market particularly concerned that Anthropic would undermine the life sciences cloud computing company’s business model. A steep fall in its share price followed.

“We believe the share price decline was excessive given the data ‘ownership’ and stickiness of its workflows in an industry in which compliance, safety and quality are paramount. Industry workflows involve not only configurations, approval chains, templates and integrations but the trained habits built up around it,” King explains.

“In addition switching costs would include data migration, rebuilding integrations with other systems (ERP, payments, CRM), retraining staff, re-engineering compliance and reporting processes, and the operational risk of downtime during a changeover. Even if a new solution could be delivered at near zero cost, the switching costs (and risks) alone would likely be prohibitive.”

It’s this customer stickiness that provides Veeva with an advantage, and its integration of AI solutions across all aspects of post clinical trials, regulation, quality control to the end sale of novel drugs to consumers should help protect it against disruption.

“The company was an early adopter of Agentic AI models across all aspects (quality/compliance/conducting stage 1-3 trials/CRM) which should boost productivity, improve outcomes and enhance sales revenue,” King adds.

“As an example, Veeva Systems recently announced it has acquired Copli, a provider of agentic medical, legal, and regulatory (MLR) solutions for the life sciences industry. Copli is now available as Veeva Falcon MLR, an agentic MLR solution that significantly accelerates content review with the potential to eliminate 70% or more of manual MLR labor within five years.”

The threat that Anthropic or another competitor like Salesforce or IQVIA could knock Veeva off its pedestal is still a real risk for investors, he says.

“However, IQVIA, Veeva’s main competitor in workflows, has agreed to cooperate in domain-specific data/expertise. Whilst both Veeva and Salesforce CRM are using Anthropic, the Anthropic-Salesforce partnership is more horizontal (spans multiple regulated industries), not a life-sciences-specific or anti-Veeva initiative — life sciences is one of several verticals mentioned, not the focus.”