The first phase of artificial intelligence (AI) was all about the infrastructure buildout. This benefitted companies like Nvidia, which makes AI chips for data centres. We’re now moving on to the second stage of the technology however, where companies are rolling out AI features and winning new customers as a result. With that in mind, here are two UK shares I believe will do well in this phase.
Working with Microsoft
The industry that’s most likely to benefit from the second phase of AI is software. Already, US software companies like Salesforce and ServiceNow have rolled out AI ‘agents’ – which can serve customers autonomously – and these firms are seeing a lot of interest in these new features.
The good news is that the UK is home to several software businesses that have their own AI features. One such company is London Stock Exchange Group (LSE: LSEG).
This company provides financial data to banks and investment management firms around the world. And in recent years, it’s been working closely with tech giant Microsoft to develop AI features.
If these features – which are due to be rolled out over the next 12 months or so – are effective, the company may be able to capture market share from competitors such as Bloomberg and FactSet. So it’s an exciting time to be an investor here (I’m an investor myself).
Our partnership with Microsoft continues to make strong progress and our product timetable is on track.
LSEG Q3 update
Now, this stock has a high valuation (like most software stocks). Currently, the price-to-earnings (P/E) ratio’s about 29. That doesn’t leave much room for a misstep (like the rollout of unimpressive AI solutions).
I think the stock will still do well in the years ahead despite this high valuation however. So I believe it’s worth considering for the long term.
It’s worth noting that analysts at Morgan Stanley just raised their target price to 13,300p. That’s about 18% above the current share price.
AI for small businesses
Another British software company that’s rolling out AI features is Sage (LSE: SGE). It specialises in accounting and payroll software for small- and medium-sized businesses.
Earlier this month, Sage announced that its new AI product ‘Sage Copilot’ is now available to early adopters initially in the US and UK on Sage Intacct. This is designed to transform how accounting and finance teams tackle their daily challenges, from quickly highlighting budget variances to providing clear answers to critical how-to questions.
This is an exciting development. I reckon it could lead to higher sales in the years ahead as businesses look to improve their efficiency. That said, Sage does face plenty of competition. Other players in this market include Intuit and Xero, and these companies also have great products.
This one’s also expensive. Currently, the P/E ratio’s about 31. I think the stock’s worth considering despite this high earnings multiple however. I don’t see the valuation as a deal-breaker, given the company’s track record and growth prospects.
Analysts at JP Morgan currently have a price target of 1,500p here (15% higher than today’s share price). They’ve named Sage one of their top picks in the European software sector.
