It’s not often that one of the most popular stocks on the FTSE 100 is trading at almost half its estimated fair value. But that’s exactly what’s happening now with RELX (LSE: REL), a company often considered a favourite among UK investors.
Using a discounted cash flow (DCF) model — which estimates future earnings — analysts put the stock at 47% below fair value. With earnings forecast to grow at 8.85% a year going forward, the potential for recovery is strong, and could be lucrative for shareholders.
But first — why is the price down, and are the factors that caused it temporary?
The AI affect
It seems likely that the driving factor behind RELX’s troubles is AI. New generative‑AI tools aimed at legal and research work look like cheaper versions of what it already sells. Some analysts fear this has spooked investors, who are now uncertain about the company’s long‑term pricing power.
Considering that the shares were already priced for perfection, these fears coupled with lacklustre FY25 results took its toll. After years of steady gains, it was trading on a very high multiple. A ‘meagre’ 7% revenue growth and 9% profit growth weren’t enough to impress investors, and it looks like many decided to take profits.
Plus, with interest rates still relatively high, big funds are wary about paying a huge premium for steady, defensive growth. Subsequently, the share price has de‑rated sharply despite the core business still growing.
To me, the fears seem overblown, but it’s still a risk. If AI does live up to the hype, it could give RELX a run for its money.
A golden opportunity, or value trap?
Under the bonnet, RELX’s numbers look much better than the share price suggests. Revenue growth may be slow but it still hit £9.59bn, with profits of about £3.34bn. Those aren’t small numbers, with its operating margin nudging up towards 31.5%.
Earnings per share (EPS) also rose, from 103.6p to 112.6p, and the full‑year dividend got another boost, up 7% to 67.5p. That’s the ninth year in a row it’s been increased, backed by 33 years of uninterupted payments.
Does that sound like a business on the brink of failure?
So, will AI destroy the business?
AI fears have clearly been a major factor in the recent RELX sell‑off, on top of a general de‑rating from a very rich valuation. But I doubt it would make the entire operation obsolete simply by replicating a few of its functions.
If anything, I suspect the company will use AI to upgrade and optimise its existing functions, essentially outpacing the threat.
Already, a growing camp of analysts believe the market has overreacted to the AI story, and I’m one of them. As far as I can tell, RELX’s financials remain rock solid. For investors hunting top-quality at a bargain basement price, I can’t think of another stock more appealing right now.
But the threat of AI shouldn’t be ignored, and this year could still bring many surprises. Remember – a portfolio of diverse stocks from various sectors and regions can help to reduce risk during volatile times.
