Artificial intelligence (AI) has shot up the public consciousness in recent months. If AI turns out to be a big development, what are the shares to buy now for my portfolio – and which ones should I be wary of?
AI could be huge. Firms including BT have announced that AI could lead to computers taking over many roles currently performed by humans, while companies like Google parent Alphabet have seen their share prices ebb and flow, based on how investors perceive their emerging AI capabilities.
The importance of a moat
Legendary investor Warren Buffett believes that successful businesses need a competitive advantage. This helps separate them from rivals, just as the moat on a medieval castle was designed to make it more difficult for potential invaders to take over.
AI is a threat to the current model of many businesses – but it is also an opportunity, in some cases a massive one. A firm like Microsoft could do well by developing and selling AI technology, for example.
So as an investor, the question I am asking myself is what companies might see their moat widen thanks to AI – and which ones could see it shrink?
The AI threat
One example of a company I think might see its competitive advantage potentially reduced by AI is Pearson. The business includes a substantial education division, offering services like teaching and exams.
If AI makes it easier for rivals to offer such services without the human labour cost base of Pearson, that could lead to price competition. I think that could be bad for its profit margins.
But might the reverse be true? Pearson already has a brand, business model and network of locations. AI could possibly help it offer its existing service but with a smaller cost base, boosting profitability.
Finding investment opportunities
In other words, just because AI could potentially change how services are delivered in a given industry does not necessarily mean all companies that operate in that sector will suffer as a result.
In fact, some may do better. AI could allow them to offer a higher quality of service, cut costs, or both.
That explains why I am not approaching investing in an AI era with a mindset of fear. I am also not planning to invest in AI startups with unproven business models. Rather, I am sticking to my knitting. That means I am looking for shares to buy in companies I think could benefit from AI by using it to widen an existing competitive moat.
Business moats
Alphabet is one example from my portfolio. The share price was hurt last year by fears about how AI might impact demand for web searches.
But I think the reverse could turn out to be true.
Google aims to connect users with information they want. AI could potentially help it do that even more effectively, building customer loyalty and potentially generating new opportunities for profit.
A moat can give a company pricing power, helping it maintain profitability even amid competitive threats. I reckon that will continue to be the case, no matter how AI evolves.
