Key Takeaways
- Shares in FTSE 100 data stocks LSEG and RELX have suffered after the two firms were caught in a wider selloff led by fears of AI disruption.
- The adoption of AI was a key focus for analysts during earnings season.
- Morningstar analysts argue AI disruption fears are overdone, and see the technology as a tailwind for the two stocks.
Data stocks LSEG LSEG and RELX REL are beginning to shake off their “AI losers” tags after positive earnings updates, analysts say.
Both FTSE 100 stocks have sold off over the last year amid concerns over how artificial intelligence might undermine software and data firms’ business models. This was most notable during February’s ‘SaaS-pocalypse,’ when software and data stocks crashed following Anthropic’s release of a legal plug-in for its Claude large language model.
The release stoked concerns that products and services provided by software and data companies could be produced by AI.
Since February, LSEG and RELX have made the case that AI is a major tailwind despite the market’s concerns.
Why AI Isn’t Threatening LSEG and RELX Stocks
While shares have staged a recovery since the February selloff, LSEG and RELX are down 7.4% and 30.2% respectively in the last 12 months.
However, this appears to be led by sentiment rather than fundamentals, according to Imran Sattar, lead manager of the Edinburgh Investment Trust EDIN.
“If you look at the business performance of companies such as RELX, LSEG, Sage and Softcat, they’ve done brilliantly over the last two years. Management teams could not be happier with the business performance,” he says.
Following that selloff, Morningstar analysts revisited the moat ratings on software and IT services stocks. LSEG and RELX retained their wide economic moats, meaning they’re viewed as retaining a durable advantage over competitors.
RELX became a contender for AI disruption due to its legal division. On Feb. 6, Anthropic released a legal plug-in for its Claude large language model, prompting fears over whether RELX’s Legal business would be disrupted.
“The irony for both businesses is that growth is actually accelerating because of AI,” says Ninety One fund manager Ben Needham, who used the selloff to add to the Ninety One UK Franchise Fund’s position in LSEG and initiate a holding in RELX.
“Both top-line and bottom-line organic growth for both companies has accelerated more recently because of the technology, rather than despite it,” he says.
He adds the pockets of each business where the market has AI concerns are performing well.
“The RELX legal business was one of the big concerns. If you study that business, where they are in the workflow for legal professionals is very much information-based, and they have proprietary data which supports that part of the workflow. It is very hard to disrupt,” Needham says.
“Where disruption is happening in workflows is further downstream, as opposed to on the information side,” he adds.
What First-Half Earnings Mean for LSEG and RELX Stocks
The impact of artificial intelligence was evident during the recent earnings season.
Following RELX’s July 23 results for the first half, analysts say the data company has gone some way to easing fears of AI disruption.
The first half saw sales growth of 7%, with a 10% growth in its legal division assisted by integrating AI tools and analytics.
Following the results, RELX chief executive Erik Engstrom said the group’s improving growth trajectory is being driven by the continued evolution of artificial intelligence, which is enabling the firm to develop and launch products at a faster pace.
Morningstar analyst Rob Hales says generative AI is a growth tailwind for RELX’s legal division, despite the disruption fears. He argues the technology will help to expand the total addressable market, while accelerating the development of new products.
“We think RELX’s wide moat is secure, and it will benefit from AI through enhanced opportunities for product innovation,” he says.
Hales views RELX as significantly undervalued, with shares trading far below their £42 fair value estimate.
How LSEG Stock Is Benefiting From AI
LSEG’s management were also keen to focus on AI during their half-year earnings, with a section of the results presentation titled ‘Five Myths about AI and our Business.’
Despite fears AI might one day be able to recreate the group’s financial data, LSEG say their real-time market data and infrastructure is not public-domain information which can be scraped and replicated by a chatbot.
The group also hit back against concerns AI will lead to a lower headcount in the financial sector and therefore mean fewer users of LSEG’s products.
LSEG says it’s working with the AI hyperscalers, having signed a 10-year strategic partnership with Microsoft back in 2022.
The London Stock Exchange owner’s recent results showed further growth in its client base signed up to its AI ‘model context protocol connector’ server, analysts say. This allows AI models to securely use the firm’s datasets, meaning LSEG can monetize the use of the technology with its datasets.
“We believe LSEG will be a beneficiary of large language models used in financial markets, increasing data demand for real-time and difficult-to-replicate datasets,” says Morningstar analyst Niklas Kammer. “This could offset the trend of declining terminal seats, which has been a headwind for the industry for over a decade.”
However, Kammer adds management was keen to “pump the brakes” on expectations of near-term revenue contributions from AI demand, due to the slow pace at which financial institutions integrate these systems into their processes.
LSEG is also viewed as undervalued by Morningstar analysts, with shares 29% below their £11.90 fair value estimate.
