Looking for AI stocks to buy? Consider this FTSE 100 giant

If I said I thought investors looking for artificial intelligence (AI) stocks should consider TESCO (LSE: TSCO), you might think I was crazy. And you might be right.

As far as I know, the company is not working on a chatbot or anything like that. But I think it could still be a big winner from the emergence of AI.

AI Actions

Investors face a dilemma when it comes to AI. The strongest companies (like Microsoft And Nvidia) look expensive and the weaker ones (without naming names) are not worth owning.

There suddenly seem to be a lot of tech experts, but I’m wary. Accurately assessing the merits of ChatGPT versus Gemini requires a lot of technical knowledge that I don’t have.

Warren Buffett emphasizes that risk comes from not knowing what you are doing. And – like Buffett – I don’t know what I’m doing in this space.

Even without deep technical knowledge, I believe there are opportunities to invest in the rise of AI. And Tesco looks like one of them.

Tesco: the beneficiary of AI

Ok, what does Tesco have to do with AI? The answer lies in data – the product needed to train and develop large language models (LLM).

Probably the UK’s most obvious AI actions are Experienced And RELX. In both cases, their greatest asset lies in the vast reserves of data available to them.

I think something similar is true for Tesco, but it may be going unnoticed at the moment. Its Clubcard program provides it with exclusive data on the purchasing habits of more than 20 million members.

This is 2 million more than Sainsbury’s has signed up to its Nectar card initiative. And it could prove a valuable resource if supermarkets find a way to integrate AI into their operations.

Investment risks

Tesco’s big challenge comes from Aldi and Lidl. And with low switching costs for customers, it’s difficult to win this battle decisively.

This is a risk that investors must take into account. And the best way to try to minimize this is to avoid overpaying for stock.

Tesco shares trade at a price-to-earnings (P/E) ratio of 11. This is not expensive compared to RELX (36) and Experian (37).

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Additionally, the company has recently increased its market share. For now at least, it competes well with its rivals.

Investing in AI

There are several ways to invest in AI. But without specialist knowledge, identifying the most promising tech companies seems like a risky business at current prices.

I’m not saying that investing in Nvidia, Microsoft, RELX or Experian won’t work well. I think it probably will, but these stocks seem fully valued to me right now.

Further down the chain, AI could help retailers better understand their customers. If so, the size of Tesco’s Clubcard program could give the company a significant advantage.

If not, buying the stock today involves paying 11 times the earnings of a company with a market-leading position in a defensive sector. It could be much worse.

The article Looking for AI Stock to Buy? Consider this FTSE 100 giant appeared first on The Motley Fool UK.

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Stephen Wright has no position in any of the stocks mentioned. The Motley Fool UK recommended Experian Plc, J Sainsbury Plc, Microsoft, Nvidia, RELX and Tesco Plc. The opinions expressed about companies mentioned in this article are those of the author and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. At The Motley Fool, we believe that considering a broad range of information makes us better investors.

Motley Fool UK 2024