Has the market misjudged Relx?

This time last year, FTSE 100 data and analytics group Relx (LSE: REL) was flying high as investors bought into the company’s AI growth story.

One year later and sentiment has changed. Shares in the blue-chip business have fallen by around 40% over the past 12 months, making the business one of the worst-performing stocks in the FTSE 100.

According to the company, it spends around $2 billion every year developing its proprietary AI technology, putting it among the biggest UK-based investors in AI.

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However, Relx has missed out on the recent global rally in AI stocks. It has underperformed the Global X Artificial Intelligence & Technology ETF by 70% over the past 12 months.

Investors have soured on the company due to concerns that it’s losing its edge.

The firm’s value fell by as much as 15% in a single day in early February after Anthropic, the maker of Claude AI, launched a suite of 11 agentic AI plug-ins to automate various tasks.

One of these is a tool targeted at in-house legal teams and academic researchers, which can review documents, flag risks and track compliance, a direct competitor to Relx’s fastest-growing product, LexisNexis.

The new product has the potential to gut this key business and democratise legal services. That’s the theoretical outlook for sales, anyway. In reality, there’s a lot more to consider.

Relx has a key advantage in data

“Clean” data is the biggest issue. AI currently struggles to work with data that isn’t in the correct format. Relx’s LexisNexis division develops and sells legal analytics and generative AI products built and trained on its exclusive legal content – one of the largest repositories of accurate legal content in the world.

The bulk of this content concerns English common law, a dominant force in global commerce that governs approximately 40% of international business and financial transactions.

English common law has been developed through judicial decisions (precedent) alongside statutes, but the majority of the case documents underpinning common law are not publicly available.

LexisNexis has spent decades acquiring, cleaning and feeding this data into its models. It hosts over 161 billion legal and news documents and records, and adds 1.6 million new documents a day. It claims to process 38 million legal documents a day.

Of the 12,000 staff employed by the group, roughly half are engaged in cleaning, managing, processing and developing data. And Relx has already announced or launched 13 products driven by generative AI. Revenue growth at LexisNexis has risen from 2% to 9% over the past six years, driven by products such as Lexis+ AI and its Protégé product. Lexis+ AI was the first AI tool rolled out in US law schools.

This isn’t just a competitive advantage. Relx’s data advantage is one-of-a-kind.

The only way a company such as Anthropic would be able to get its hands on the data that Relx has spent decades accumulating would be to buy the business.

Initial indications suggest users have already discovered the drawbacks of Anthropic’s tools. Users have cited sloppy or made-up results based on freely available data hosted on sites such as Wikipedia.

So it looks as if the market has overreacted to the potential competitive threat of Anthropic’s new AI tools. Relx still has the structural advantage. Growth may take a short-term hit as investors try out other tools, but Relx will ultimately remain the single best and most reliable source for the world’s leading legal minds.

Relx’s legal business accounts for around a fifth of group revenue.

Its biggest divisions are its risk-management arm, which accounts for around 40% of revenue, and its scientific, technical and medical (STM) business, which accounts for around 30% of revenue. One of Relx’s best-known brands includes ScienceDirect, the world’s largest scientific and medical database.

All of these core businesses operate around the same framework.

The company has a bespoke proprietary dataset that helps its customers make better decisions and produce trusted research.

AI is actually helping the STM business rather than hindering it. Academics and publishers have reported an explosion in so-called “AI slop” making its way into scientific papers, with some figures suggesting as much as 50% of published content is now co-authored by AI.

This means it’s now more important than ever for scientists and researchers to know the source of their research. That’s especially true in industries such as biotechnology, where the outcome of the paper can literally involve the difference between life or death.

This is only going to reinforce the need for trusted data repositories.

Expect steady growth from Relx

Last year, Relx’s revenue grew 7% while adjusted operating profit ticked up 9% to £3.3bn.

Earnings per share rose 10% thanks to a £2.5 billion share buyback, £1.5 billion of which was executed last year. And while the world’s leading AI players, such as ChatGPT’s owner OpenAI, devour cash, Relx reported cash flow of £3.3 billion in 2015 with a cashflow conversion rate of 99%.

The company’s cash generation underpins its dividend, which increased 7% last year to 67.5p, and its share buyback, as well as selective acquisitions.

Last year, the company completed five small acquisitions for a total consideration of £270 million. Following the results, analysts at Investec slapped a “Buy” rating on the shares, noting the company’s expanding competitive advantage in the sector.

With the stock trading at a forward price-to-earnings (p/e) ratio of around 19, compared with its five-year average of 29.5, now could be the time to snap up this data giant’s shares while the market is looking the other way.

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