The artificial intelligence (AI) revolution has begun! It may impact many businesses and one FTSE 100 stock that could be adversely impacted is Pearson (LSE: PSON). Despite this, I would still buy the shares if I had some spare cash. Here’s why.
Publishing and educational materials
Pearson is an international ‘learning company’. The business operates via five divisions: Higher Education, Assessments and Qualifications, Virtual Learning, English Language Learning, and Workforce Skills.
So what’s happening with Pearson shares currently? Well, as I write, they’re trading for 841p. At this time last year, the shares were trading for 880p, which is a 4% drop over a 12-month period. For context, the FTSE 100 index as a whole is up just half a percentage point over the same period.
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AI fears and positive H1 results
Fears around the rise of AI impacting businesses like Pearson have risen, especially in recent months. Tools like ChatGPT are transforming the ways individuals are able to access materials and learn. In fact, Pearson’s US-based competitor Chegg stated in May that AI is hurting its business. This caused a market reaction. Pearson shares actually fell 15% in one day back then.
From my perspective, AI is one of the bigger threats to Pearson’s ability to perform and provide consistent returns. The reason I’m not overly worried is because Pearson is protected through its diverse operations. In contrast, Chegg does not possess similar diversification, which is why I believe it stated its position about AI impacting its business.
Furthermore, AI is pretty much still in its infancy and there is a lot of hype around it, perhaps some of it overplayed. At this stage, ChatGPT has its limitations and I don’t believe it can immediately replace the offering of Pearson and similar businesses. However, I will keep a keen eye on how the technology develops.
From a bullish perspective, Pearson released a half-year report at the end of July that vindicated my position on the stock. It posted a 44% rise in operating profit and underlying sales grew by 6%. This is primarily down to a rise in English Language Learning. Finally, adjusted earnings per share rose, albeit modestly, to 25.6p from 22.5p for the same period last year.
In addition to this, Pearson shares provide a passive income opportunity with a dividend yield of 2.6%. I do understand that dividends can be cancelled at any time.
A FTSE 100 stock I would buy
Pearson shares look like a good option for my holdings at present. I believe the firm’s reputation as well as recent and historical performance help me make my investment case. The passive income opportunity also helps.
As well as the threat AI poses, Pearson shares do look a tad expensive with a price-to-earnings ratio of close to 20. Any stock market correction or negative news could send shares tumbling.
Overall, I’m not worried about the AI revolution when it comes to Pearson shares. I view it as a good FTSE 100 stock to buy and hold for my portfolio.
