Has the market miscalculated Relx?

Fears that AI was going to eat its lunch caused Relx shares to plummet, but the company is still in a strong position to grow

Relx (LSE: REL), an FTSE 100 data and analytics group, was soaring at this time last year as investors embraced the company's AI growth narrative.

Sentiment has shifted after a year. The blue-chip company is among the worst-performing stocks in the FTSE 100 after its shares dropped by about 40% in the last 12 months.

The company claims to be one of the largest UK-based investors in AI, spending about £2 billion annually on the development of its proprietary AI technology.

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However, Relx has not benefited from the recent global surge in AI stocks. Start your trial now. Over the last 12 months, its performance has fallen 70% short of that of the Global X Artificial Intelligence and Technology ETF.

Due to worries that the company is losing its edge, investors have turned against it.

Early in February, Anthropic, the company that makes Claude AI, released a suite of 11 agentic AI plug-ins to automate different tasks, causing the firm's value to drop by as much as 15% in a single day.

One of these is a tool that is aimed at academic researchers and internal legal teams. It is a direct rival to Relx's fastest-growing product, LexisNexis, and can review documents, identify risks, and monitor compliance.

It is possible that the new product will democratize legal services and destroy this important industry. In any case, that is the sales forecast. There is actually much more to take into account.

Chart of RELX share prices.

Data is one of Relx's main advantages.

The main problem is "clean" data. Currently, AI has trouble processing data that isn't formatted correctly. The LexisNexis division of Relax creates and markets legal analytics and generative AI products that are trained on its proprietary legal content, which is one of the world's biggest repositories of accurate legal content.

About 40% of international business and financial transactions are governed by English common law, which is a major force in global commerce.

Although statutes and court rulings (precedent) have contributed to the development of English common law, most of the case files that support common law are not accessible to the general public.

This data has been gathered, cleaned, and fed into LexisNexis' models for decades. Over 161 billion legal and news documents and records are stored there, and 1.6 million new documents are added every day. It says it processes 38 million legal documents every day.

Of the group's 12,000 employees, about half work in data development, management, processing, and cleaning. Additionally, Relx has already announced or introduced 13 generative AI-powered products. Over the previous six years, LexisNexis's revenue has increased from 2% to 9%, primarily due to the company's Protg product and Lexis+ AI. In US law schools, Lexis+ AI was the first AI tool introduced.

It's more than just a competitive edge. Relx's data advantage is unique.

Only by purchasing the company would a company like Anthropic be able to obtain the data that Relx has been gathering for decades.

Based on preliminary findings, users appear to have already identified the limitations of Anthropics tools. Users have pointed to careless or fabricated results based on publicly accessible information found on websites like Wikipedia.

The market appears to have overreacted to the new AI tools from Anthropics, which could pose a competitive threat. The structural advantage is still held by Relx. Relx will continue to be the best and most dependable source for the world's top legal experts, even though growth may be temporarily hampered while investors experiment with other tools.

About one-fifth of the group's income comes from Relx's legal business.

Its two largest business segments are its scientific, technical, and medical (STM) division, which generates about 30% of revenue, and its risk-management division, which generates about 40% of revenue. One of Relx's most well-known brands is ScienceDirect, the biggest scientific and medical database in the world.

These core businesses all function according to the same structure.

In order to help its clients make better decisions and generate reliable research, the company has a custom proprietary dataset.

Rather than impeding the STM business, AI is actually helping it. The amount of "AI slop" that appears in scientific papers has skyrocketed, according to academics and publishers. According to some estimates, up to 50% of published content is now co-authored by AI.

Because of this, it is more crucial than ever for researchers and scientists to know where their work comes from. This is particularly true in fields like biotechnology, where a paper's conclusion may literally mean the difference between life and death.

The necessity for reliable data repositories will only be strengthened by this.

Expect Relx to grow steadily.

Relx's revenue increased by 7% and its adjusted operating profit increased by 9% to £3.3 billion last year.

A 2p5 billion share buyback, of which 1p5 billion was carried out last year, helped to boost earnings per share by 10%. Even though the biggest AI companies in the world, like OpenAI, the company that owns ChatGPT, eat up cash, Relx reported £33 billion in cash flow in 2015 with a 99 percent cashflow conversion rate.

The company's cash generation supports its share buyback, dividend, which rose 7% to 67p/share last year, and careful acquisitions.

Five minor acquisitions totaling 270 million were completed by the company last year. Investec analysts gave the shares a "Buy" rating after the results, citing the company's growing competitive advantage in the industry.

Given that the stock is currently trading at a forward price-to-earnings (p/e) ratio of about 19, as opposed to its five-year average of 29.5, now might be the ideal moment to purchase shares of this data giant while the market is looking away.