With the markets growing more volatile, I’m once again on the hunt for the best shares to buy. And right now, my attention is on data & analytics firms. Why? Because earlier this month, a massive wave of panic selling kicked off as the threat of new disruptive AI models dominated media headlines.
While most of the volatility appears to have been concentrated among US tech stocks, some drops also emerged here in the UK. And two companies that have been hit particularly hard are RELX (LSE:REL) and London Stock Exchange Group (LSE:LSEG).
But with fear driving investor decision-making, has all this volatility created a screaming buying opportunity?
What’s going on?
As always, there are a lot of contributing factors behind the recent sell-off in data-oriented businesses. But one of the biggest catalysts was the announcement of Anthropic’s legal AI tool.
With a few prompts, legal firms can use it to take care of important everyday tasks like contract analysis, compliance, and risk assessment, among other things. And with additional AI plugins in development, this sort of functionality is expected to spread into other sectors like scientific research and financial services.
For RELX and LSEG, these tools are a new disruptive threat to their existing businesses.
Both charge considerable subscription fees to customers to access proprietary databases and analytics for these industries. But if AI models can offer similar solutions at a fraction of the cost, the pricing power of these firms could be on track to collapse.
Taking a step back
While this new AI threat is concerning, investors have definitely reacted with a ‘shoot first, ask questions later’ mindset. And subsequently, a chorus of institutional investors has described this recent sell-off as unjustified.
What’s more, they might have a valid point.
In legal, scientific, and financial fields, data quality, trust, and liability all create a protective moat around incumbent data providers like RELX and LSEG. After all, we’ve already seen AI hallucinations getting lawyers disbarred.
This all points towards a ‘trust but verify’ approach to AI usage within professional fields – something that only curated data providers can deliver. And it’s an overlooked advantage that already appears to be supporting growth, with both firms gaining revenue momentum courtesy of their own AI-powered solutions.
With that in mind, it’s not surprising to see multiple institutional investors move these shares to the top of their recommended buy lists in February.
So, is now the time to do a bit of shopping?
The bottom line
Right now, I think it’s fair to say, investors are seriously underestimating the ability of incumbent data providers to adapt.
Both RELX and LSEG are integrating their own AI tools into their existing platforms to counter this threat, trained on significantly higher quality and continuously updated data – an advantage that most third-party AI models don’t have.
Having said that, this may ultimately not matter. Even if these curated data platforms remain mission-critical, cheap alternative AI models that become ‘good enough’ could nonetheless reduce the number of required seats a customer needs for these premium tools.
Therefore, while I definitely think investors have overreacted, I’m also not in a major rush to buy these shares either. Instead, I think there are other investment opportunities to explore today with less long-term uncertainty.
