Is this the best AI growth stock in the UK today?

AI growth stocks are on fire in 2024, with valuations skyrocketing. Is this UK small-cap next in line to see its status surging long term?

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The London Stock Exchange has its fair share of growth stock opportunities for investors to pick from. But when it comes to AI-powered, tech-driven enterprises, the list of options isn’t exactly long.

In fact, looking at the FTSE All-Share index, there’s a grand total of 16 companies operating within the technology industry. That’s just 1.4% of the total index. By comparison, in the S&P 500, technology represents almost 34%.

However, even with this lack of choice at home, British investors still have some interesting potential AI investments to explore. And one company I’ve added to my portfolio is dotDigital (LSE:DOTD).

Using AI to power e-commerce

Using its Customer Experience and Data Platform (CXDP), businesses are able to automate and personalise the creation of multi-channel marketing campaigns. For the most part, it’s a solution that’s being used by e-commerce enterprises to drive repeat purchases from customers through email, text, social media, etc.

dotDigital’s hardly short on competition in this space. After all, there are plenty of similar services, some of which are considerably larger with far deeper pockets. Yet, despite these intense rivalries, dotDigital has managed to carve out a steadily increasing portion of market share.

With an estimated £42 of value created for every £1 spent by customers on email campaigns, the average revenue per user each month now stands at £1,709 a month compared to £966 five years ago. And this upward trend looks primed to continue now that AI’s entering the picture.

Using its WinstonAI model, the CXDP platform is able to analyse the customer data of a business and generate a profile. This is then used to start making predictions about future behaviour, determining which customers are most likely to place another order, what items they’re most likely to buy, and when a purchase is most likely to occur.

Apart from extrapolating critical metrics like customer lifetime value, this added level of insight enables companies to allocate their marketing budgets to maximise conversion and effectiveness. Needless to say, that’s a powerful competitive advantage.

Every opportunity carries risk

From a technological standpoint, dotDigital seems to have its bases covered. WinstonAI is proprietary, making it far harder for competitors to replicate a similar solution. But that doesn’t mean they won’t try. And should a rival firm create a superior prediction model, dotDigital’s value-creation proposition may start losing its thunder.

The reliance on user data also makes the platform a prime target for cyber attackers and ransomware. So far, the firm’s kept its platform secure. But should the group fail to maintain and evolve its cyber security solutions, a breach could be immensely problematic, both financially and reputationally.

The bottom line

Even with these challenges, dotDigital continues to be a stand-out business, in my opinion. The downturn in the e-commerce sector in 2022 wreaked havoc with its stock price. Fortunately, economic conditions have since improved, and growth has returned. Yet, the small-cap growth stock has yet to make a comeback. That’s why I think a potential buying opportunity has emerged for my portfolio.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Zaven Boyrazian has positions in Dotdigital Group Plc. The Motley Fool UK has recommended Dotdigital Group Plc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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