The IDC Worldwide Semiannual Artificial Intelligence Tracker shows worldwide artificial intelligence (AI) revenues surpassing $300 billion in 2024, with a five-year compound annual growth rate (CAGR) of 17.1%.
The analysts go on to say: “Rising demand for expertise in embedding AI-enabling technologies into business analytics and intelligent automation programs has led to a highly competitive and fragmented AI services vendor landscape.”
In a PwC survey, a quarter of the companies participating reported widespread adoption of AI, up from 18% the previous year. Another 54% are heading there fast, meaning they are looking to scale or implement artificial intelligence.
Artificial intelligence is an area that been developing for a while then. Its applications will be increasingly varied and used within many industries, meaning valuations will potentially rise in 2021 and in the coming years.
One area of particular application is in the medical industry. That’s the sector that two of the companies in this article operate (excuse the pun) in. The first is IXICO, the second is Renalytix AI. However, it should be noted that the applications extend into many other industries already, from legal to automotive, to much more besides. That’s why this article will also look at Blue Prism.
A niche AI share with a market cap below £50m
IXICO (LSE: IXI) is an AI biotech company that has been working since 2004 to help advance therapies for neurological diseases, for example, Alzheimer’s disease. It delivers specialist data analytics services that identify and measure unique biomarkers from brain scans and wearable biosensor data produced in clinical research programmes. The results it delivers support clients in their clinical decisions.
When it comes to using AI, IXICO has its proprietary LEAP algorithm harnesses the power of large datasets and computer-based learning to segment-specific regions of the brain and then accurately measure their volume. This provides a reliable method of measuring brain atrophy, which can indicate the progression of neurological disease. On top of this, developed AI technology to assess brain pathology like white matter lesions and, more recently, used data from wearable biosensors to accurately measure sleep patterns in Parkinson’s Disease and dementia patients.
IXICO investing for growth and moving into profit
In its latest annual report, released December 2020, the group says it is investing for the future. For example, it’s investing in a next-generation image upload and analysis platform to support scaling of the Group. This is a major investment in its technology, which should benefit shareholders in the future.
When it comes to growth the group is clearly focused on innovating and also growing both organically and acquisitively. The former is more important and the group doesn’t seem particularly acquisitive.
At 30 September 2020, the group had an order book of £21.7m, which is a record, and an achievement in the context of the Covid situation. It is one measure helping show that there is serious demand for the services IXICO supplies. The group has stated that it intends to invest so that growth once the pandemic eases will be greater.
Revenue growth has been strong, just about tripling between 2016 and 2020. This has enabled the group over the same timeframe to move from being loss making to making a small profit. For 2020, the operating profit was £826,000.
2020 was a strong year for new contract wins. Just in December, it landed a four-and-a-half-year contract worth £3.4m. That contract was with an existing client working on a trial of a drug for the rare neurodegenerative condition Spinocerebellar Ataxia type 3 (SCA3). The condition is also known as Machado-Joseph disease.
One aspect I think that’s disappointing given it’s a small company is how little management own of it. The CEO and CFO are both relatively new, but having more skin in the game would be good to see. The biggest shareholder by far is the British Growth Fund, which has nearly 20% of the shares. It’s followed by Octopus Investments, Gresham House Asset Management and Amati Global Investors consecutively. All these investors own between 10-14% of the shares each.
With a market capitalisation below £50 million, IXICO could be a share with great future potential. It appears to have plenty of potential to grow much further. Although as can be seen from the chart below the shares have struggled a little bit recently.
Another healthcare AI share
Renalytix AI (LSE: RENX) is another healthcare-focused AI company. It provides in vitro diagnostics focused on optimising clinical management of kidney disease. It provides improved clinical management through its KidneyIntelX platform.
KidneyIntelX is a proprietary artificial intelligence-enabled algorithm. It combines diverse data inputs, including validated blood-based biomarkers, inherited genetics and personalised patient data from electronic health record, or EHR, systems, to generate a unique patient risk score. This patient risk score enables prediction of progressive kidney function decline in chronic kidney disease, or CKD, allowing physicians and healthcare systems to optimize the allocation of treatments and clinical resources to patients at highest risk.
Renalytix is much bigger by market cap than IXICO, despite only listing in Q4 2018. At the time of writing it’s valued at just over £565m. It is however still pre-revenue and therefore loss making. It does though have exciting partnerships with Mount Sinai. With Mount Sinai it has a joint venture to develop test kits for the detection of Cov-2, which it’s hoped will be sold internationally. Its other strategic partnership is with UK-listed pharma giant AstraZeneca. That partnership is using KidneyIntelX to identify patients earlier that have progressively declining kidney function.
All set for good times in the US – maybe
In its latest annual report, Renalytix states that it expects testing sales to begin in the first half of the financial year ending 30 June 2021. In August 2020, the AI company announced that it had filed a submission with the US’s Food and Drug Administration (FDA) – this follows on from a May 2019 announcement that KidneyIntelX was granted Breakthrough Device designation by FDA. This is another step forward and a positive outcome would undoubtedly be a big boost for the shares.
If, or when, it comes, Renalytix would be able to roll out its product across the US and carry out millions of tests at $950 a time. This will give it a route to greater revenue and profits, which explains its higher market capitalisation than IXICO.
Another positive is that the chairman and CEO are the second and fourth-largest shareholders respectively, although neither has bought more shares in the last year. The Icahn School of Medicine at Mount Sinai is the biggest shareholder in the AI group, holding just under 15% of the shares.
As the share price chart shows below, the shares have been doing well recently, most likely in anticipation of an FDA update in the coming months and the potential to be a game changer that that would be.
Blue Prism is another option but it faces more challenges
Blue Prism (LSE: PRSM) makes enterprise robotic process automation software that provides a digital workforce designed to automate complex, end-to-end operational activities. So it’s a little different to the two AI companies above, not least as it doesn’t focus on the healthcare market specifically and is less niche. It has over 2000 customers, with 490 new customers added during 2020.
Blue Prism is targeting the large end of the market – what it terms enterprise customers. Those that have the budget and the infrastructure to support a digital workforce.
Management shareholdings are positive for this AIM share. Jason Kingdon, who combines the role of chairman and CEO owns just over 6%, while Alastair Bathgate continues to own just under 5%. Other major investors include Jupiter and Invesco.
Does it do well when it comes to revenue growth? The answer to that based on growth from 2016 to 2020 has to be a resounding yes. The figure has flown up from £9.64m to £141.40m. The revenue growth gives it a basis on which to scale the business and like other tech companies, the profits will come later. Technology investors, by and large, accept that.
However, Blue Prism’s shares did fall heavily earlier this month (January 2021) when its full-year results stated that revenue in its current financial year would be below market expectations. That came alongside a restatement of historic figures.
Downsides of investing in Blue Prism
There are a few downsides to be mindful of with this business. In 2020 the founder and chief executive left the board, but on the upside remain a major shareholder. He participated in a fundraising that cam alongside his departure. The other possible red flag is a change in auditor, which cam out of the blue and not long after the executive departure. However, the fact Grant Thornton picked up the reins means this isn’t overly concerning.
Looking at the balance sheet the level of deferred revenue is high and growing which also might be a concern? Why isn’t Blue Prism able to collect the money it’s invoicing? Other tech companies have allowed this number to swell and it doesn’t always end well, especially for investors. It’s worth keeping an eye on.
The biggest problem Blue Prism has though is competition. The Financial Times Lombard column has called it “a lightweight player in a highly demanding industry.” The column goes on to point out that UiPath and Automation Anywhere to land the big enterprise customers while at the simpler end of the market SAP and Microsoft can just add functions that do a similar job. Short sellers still also circle the company, indicating they smell blood.
Final thoughts on these three AI shares
While none of these artificial intelligence companies is dividend-paying, the focus is currently on growth. AI is not a groundbreaking new technology so there’s quite a lot of competition, especially so for Blue Prism which is less niche. For investors, the opportunity from AI is definitely from capital growth. These businesses need to be reinvesting in R&D and scaling in order to deliver investor returns and as such, investors shouldn’t expect dividends soon, even as these companies move towards – or already are in IXICO’s case – profitable.
There are of course other UK listed artificial intelligence shares. These are just some of the companies that investors have access to. Over the coming years, the list will likely grow. Out of the three above Blue Prism seems the most likely to disappoint investors, its shares seem particularly volatile. RenalytixAI could make rapid progress once it commercialises its platform, making it potentially the pick of the bunch.
Moving away from individual AI shares
If you prefer not to try and pick individual shares in this complicated and increasingly competitive field, then there are ETFs that can track a broader range of listed companies.
Two examples are the Legal & General UCITS ETF Plc Artificial Intelligence UCITS ETF USD (AIAI) and the WisdomTree Artificial Intelligence UCITS ETF USD Acc (INTL). The former has 70 holdings. The top holdings are: Baidu, Proofpoint and MongoDB. Blue Prism is the fifth-biggest holding of the ETF.
The WisdomTree ETF has 40% of its portfolio within its top 10 holdings. The top three holdings are Appian Corp, Veritone and Blackberry. The United Kingdom accounts for just 1.85% of the portfolio. That shows just how far behind the US and Asian markets like Taiwan and Japan, the UK is.
As we’ve seen with renewable energy, once investor sentiment shifts in favour of an industry, valuations can rise fast. That’s still yet to fully happen when it comes to artificial intelligence as shown by the small number of specialised ETFs and funds. Yet it’s a huge area of potential growth.
Over the next few years, artificial intelligence is likely to reach a critical mass and investors both private and institutional will sit up and take notice. It’s more profitable to own shares before that happens, which is why it might be worth researching AI shares sooner rather than later.
The author currently has no positions in IXICO, RenalytixAI or Blue Prism at the time of writing (Jan 2021), although this may change in the future.
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