The best time to buy shares is when they’re out of fashion with investors. And that’s definitely the case with Experian (LSE:EXPN) right now.
Analysts, however, expect the stock to bounce back strongly. So with the average price target 54% above the current level of the stock, is this a rare chance to buy?
A FTSE 100 heavyweight
Experian is one of the FTSE 100’s most impressive businesses. It has a big competitive advantage that doesn’t take huge capital investments to maintain.
The firm’s edge comes from the data it uses to produce its reports. This comes from a vast number of sources and includes a lot of information that isn’t publicly available.
On top of this, Experian’s credit scores have been a key asset for US lenders wanting to resell mortgages they originate. While this has evolved recently, it’s still largely the case.
That’s why the company’s shares have always traded at above-average multiples. But the stock market currently thinks the business might become an artificial intelligence (AI) casualty.
The AI disruption threat
AI won’t be able to match Experian’s product – it doesn’t have the data. But the concern is that it might be able to offer a close-enough alternative at a fraction of the price.
The FTSE 100 firm has an extremely strong position in the mortgage market, but that’s only one part of the business. The rest is things like payday loans and credit cards.
In these cases, lenders might think an AI-driven background check that uses less data is good enough at a much lower price. And that’s the real threat for Experian to deal with.
This is why the stock has been falling. But the question for investors is whether it justifies a 34% fall from its highs, or whether investors are overreacting to a new and unusual threat.
How resilient is the business?
There hasn’t yet been any sign of disruption in Experian’s results. The latest update reported 8% organic revenue growth and it expects this to continue in the next few months.
Investors, though, need to think carefully about this. With the kind of threat the company is facing, things can change suddenly and without warning.
That means the insights investors can get by looking at past results are very limited. This is always the case to some extent, but it’s especially true with Experian right now.
If AI competition starts to make progress in key markets, the situation could change very quickly. So investors need to look past the numbers to assess the firm’s resiliency.
Time to buy?
At its highs, a £10,000 investment in Experian bought 244 shares. With the stock now well below that level, investors can get 373 shares for the same amount of cash.
Analyst price targets suggest the stock is expected to bounce back strongly in the near future. But I think investors need to be a bit careful with this one.
While its core mortgage business is very well-protected, I can see some big potential threats elsewhere. And those need to be taken seriously.
I think the rise of AI is creating some unusually good investment opportunities. But Experian isn’t the stock I’m scrambling to buy right now to take advantage.
