Artificial intelligence (AI) is a hot topic in the investment world right now. It seems the release of AI-powered chat platform ChatGPT has ignited interest in this emerging area of technology. Now, most of the biggest AI stocks are listed in the US. However, there are plenty of UK companies that are active in this space. Here’s a look at three that I believe are worth watching.
Digital transformation specialist
Let’s start with Kainos (LSE: KNOS). It’s a technology company that helps public and private organisations with digital transformation.
It has considerable experience in artificial intelligence and machine learning (ML), having already delivered related solutions to hundreds of customers globally. It has used the technology to help organisations in areas such as demand forecasting, risk management, fraud detection, and virtual assistants.
One example of Kainos’s AI expertise in action is a project with HM Land Registry. Here, it developed a solution that could flag up discrepancies in documents and help automate deed comparison.
It’s quite an expensive stock. Currently, it has a forward-looking price-to-earnings (P/E) ratio of about 34. This adds risk.
However, this is a high-quality company with an excellent growth track record. So, I don’t think the valuation is crazy.
AI in digital marketing
Another UK company that uses artificial intelligence technology is dotDigital (LSE: DOTD). It’s a software company that specialises in email marketing software.
One way dotDigital uses AI is with its product recommendations. The way these work is that if a retail customer has purchased one product, the technology will suggest other related products. All of the heavy data work here is essentially handled by machine learning.
Now, its growth has slowed lately. Recently, the group told investors that revenue growth for the six-month-period ended 31 December was just 9%. Two years prior, top-line growth was 22%.
However, the stock has come down a long way over the last 18 months. So, the slowing growth appears to be reflected in the share price. At current levels, I think it’s worth a closer look. The forward-looking P/E ratio is about 24.
Online shopping solutions
A third British company that uses AI is Ocado (LSE: OCDO). It’s a food delivery and warehouse automation business.
Ocado uses artificial intelligence to enhance its operations in several ways. One is food forecasting. Here, its forecasting engines make millions of accurate predictions per day, which the company applies to orders with suppliers in real time to manage stock levels.
It also uses AI to determine what new stock should be unpacked at the warehouse first. This helps it avoid spoilage.
When it comes to online grocery, there are many stages between a customer making an order and their items arriving where AI makes a big difference.
Ocado
One thing to note about Ocado is that it’s not profitable at the moment (Kainos and dotDigital are). This lack of profitability adds a lot of risk to the investment case.
I think the stock is still worth watching, however. If the company can continue to land contracts with other supermarkets to automate their operations, and reduce its own losses, there could be share price upside here.
