The use of artificial intelligence (AI), big data, and other cutting edge innovations in sectors outside of information technology is increasing. Formerly ‘old world’ industries are becoming more high tech as a result. Not only can using AI and big data increase productivity, but they can also potentially change investors’ perceptions.
Being perceived as more ‘high tech’ has helped some stocks attain higher valuations in the past. Here’s how I think the increasing usage of cutting edge innovations could affect the Rolls-Royce (LSE:RR) share price.
A trend to higher technology
It used to be that only IT and computing-related companies were considered as tech by many investors. Now I reckon that perception is changing. Tesla, for example, has shown that it’s possible for an industrials/consumer cyclical company to also be considered a technology company.
Tesla’s main product is cars, something that is an industrial/consumer cyclical product. Yet Tesla is also an IT company. It is gathering big data via car sensors to develop an autonomous driving technology product powered by AI. The market seems to regard Tesla as more of a tech company, given its very optimistic valuation.
Given the nature of its business, I think Rolls-Royce is similar to Tesla in that it is both an industrial and a tech company in one. On the one hand, Rolls-Royce makes industrial products like jet engines. On the other hand, it analyses and incorporates a lot of data into making products. Given the similarity, I reckon Rolls-Royce has the potential to be perceived as more of a tech company if management makes the right moves.
In terms of management moves, Rolls-Royce is doing several things currently. First, the company is “using advanced analytics, industrial Artificial Intelligence and machine-learning techniques to develop data applications that will unlock design, manufacturing and operational efficiencies within Rolls-Royce, and create new service propositions for customers”. Second, the company is researching new technology, such as hybrid power and air taxi propulsion systems that could help it in terms of its tech perception.
The Rolls-Royce share price: what I’d do
If management succeeds in using AI and big data to create better or new products and services for customers, I think the Rolls-Royce share price could benefit from potentially more demand or higher margins. I also reckon the company could potentially gain a higher valuation if the market perceives it more as a tech company.
With that said, Rolls-Royce isn’t Tesla. Tesla has an opportunity in the brand-new autonomous driving market. With the right execution, the market could be very lucrative. Given that air travel is more mature, I reckon Rolls-Royce’s opportunities aren’t as great in the medium term. In the near term, Rolls-Royce also still faces challenges with Covid-19 variants. If the pandemic lasts longer than expected, the stock might not do as well.
Nevertheless, I’d buy and hold the stock at the current Rolls-Royce share price. Rolls-Royce spends a lot on research and development, and the company has many world-class engineers. I reckon the company has a shot at making new AI/big data powered products that can increase profits meaningfully in the future. I also believe Rolls-Royce will benefit from the eventual recovery in air travel.
