If I said I thought investors looking for artificial intelligence (AI) shares to buy should consider Tesco (LSE:TSCO), you might think I was mad. And you might be right.
As far as I’m aware, the company isn’t working on a chatbot or anything of the sort. But I think it might still be a big winner from the emergence of AI.
AI shares
Investors face a dilemma when it comes to AI. The strongest companies (like Microsoft and Nvidia) look expensive and the weaker ones (not naming names) aren’t worth owning.
There suddenly seems to be a lot of tech experts around, but I’m wary. Accurately assessing the merits of ChatGPT against Gemini takes a lot of technical knowledge that I don’t have.
Warren Buffett points out that risk comes from not knowing what you’re doing. And – like Buffett – I don’t know what I’m doing in this space.
Even without deep technical knowledge though, I think there are opportunities to invest in the rise of AI. And Tesco looks like one of them.
Tesco: the AI beneficiary
Ok, what does Tesco have to do with AI? The answer is data – the commodity needed to train and develop large language models (LLMs).
The UK’s most obvious AI stocks are probably Experian and RELX. In both cases, their biggest asset is the vast data reserves they have.
I think something similar is true of Tesco, but it might be going unnoticed at the moment. Its Clubcard scheme provides it with proprietary data about the shopping habits of over 20m members.
That’s 2m more than Sainsbury’s has signed up to its Nectar card initiative. And this could be a valuable resource if supermarkets find a way to integrate AI into their businesses.
Investment risks
Tesco’s big challenge comes from Aldi and Lidl. And with low switching costs for customers, it’s hard to win that battle decisively.
That’s a risk investors need to consider. And the best way to try and minimise this is to avoid overpaying for the stock.
Tesco shares trade at a price-to-earnings (P/E) ratio of 11. That isn’t expensive compared to RELX (36) and Experian (37).
On top of this, the company’s been growing its market share recently. For the time being at least, it’s competing well against its rivals.
Investing in AI
There are a few ways to invest in AI. But without specialist knowledge, identifying the most promising tech companies looks like a risky business at today’s prices.
I’m not saying that investing in Nvidia, Microsoft, RELX, or Experian isn’t going to work out well. I think it probably will, but those stocks look fully-valued to me right now.
Further down the chain, AI could help retailers understand their customers better. If it does, the size of Tesco’s Clubcard scheme could give the company a big advantage.
If it doesn’t, then buying the stock today involves paying 11 times earnings for a business with a market-leading position in a defensive industry. That could be a lot worse.
