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Chinese artificial intelligence (AI) startup DeepSeek has taken the world by storm. For those living under a rock this week, the company claims to have developed an innovative AI model for a fraction of the cost of other industry leaders, including OpenAI.
That sparked a sell-off in the tech-heavy Nasdaq and among technology stocks more broadly. Chip manufacturer Nvidia experienced an historic 17% single-day loss that wiped $589bn (£475bn) off its market cap on Tuesday.
While some investors are now questioning valuations and growth expectations, I have two AI-related stocks that I’m considering buying under the microscope.
Enterprise software giant
Sage Group (LSE: SGE) is first cab off the rank. The company is a leader in enterprise software specialising in accounting and payroll services.
Integration of AI into its product suite has increased automation and improved analytics capabilities. This, in turn, has helped boost the company’s share price by 80% in the past five years to £13.35 per share as I write (29 January).
A 21% increase in full-year underlying operating profits to £529m and a margin increase of 220 basis points to 22.7% says to me that the strategy is working. At the forefront of a growing industry, the stock doesn’t come cheap with a price-to-earnings (P/E) ratio of 42.4.
While I’m considering buying, I do think that’s a hefty price to pay in an uber-competitive and continuously evolving space like enterprise software where the next challenger is never far away.
IT infrastructure services
Staying with the technology theme, Softcat (LSE: SCT) is a stock I track closely. The IT infrastructure provider has a range of services including software licensing, hardware procurement, and cloud computing.
The ability to leverage AI’s innovative and efficient solutions is proving a profitable one. The company’s growth trajectory has been impressive, punctuated by a 9.3% increase in its FY24 operating profit to £154.1m.
Softcat shares are trading at a multiple of 26.5 times earnings. That’s significantly lower than Sage, but still more than double the FTSE 250 average of around 12.9.
Much like Sage, Softcat is a fast-growing and recognisable name in a market with huge potential growth. However, the price reflects this, while the need for constant innovation and potential market saturation are just a couple of risks that could rain on the growth parade.
Key takeaway
While DeepSeek has grabbed headlines, the investable AI universe is large. We’ve seen the astronomical growth in Nvidia’s valuation in recent years but there are ways I could get exposure to the AI trend without it being a chip maker or AI developer.
I am considering buying both Sage and Softcat, but I don’t think it will be in the near future. I don’t have the spare funds to invest right now, and I think defensive sectors like pharmaceuticals are better bang for my buck at present.
