Technology

These 12 ASX stocks are leading Australia’s AI revolution

Wed 29 May 24, 1:41pm (AEST)
ai articial intelligence adoption
Source: Shutterstock

Key Points

  • Morgan Stanley believes the speed of change and relentless penetration of new use cases could mean AI is just as impactful as the internet was in the 1990’s
  • There are several ways ASX companies can leverage the AI boom, and substantial benefits from doing so
  • However, AI adoption isn’t without risks and costs, and companies need to be careful with how the proceed

How do the CEOs of companies in your portfolio approach AI?

This is the question posed by Morgan Stanley research analysts in their latest deep dive into how ASX listed companies are (or are not yet) embracing artificial intelligence.

The broker notes there’s plenty of appetite among their clients as to how exactly is the best way to get exposure to the growing AI boom via ASX-listed companies. After all, one could argue that we’re just at the beginning of what could be one of the most defining developments in human history.

On this point, Morgan Stanley likens the future adoption of AI technologies as akin to the adoption of the internet back in the 1990’s. Just as it was “hard for investors to envisage a super-connected world” back then, the broker believes “the speed of change and relentless penetration of new use cases” for AI could make it just as impactful.

Despite the fact that investors are clearly thinking about these impacts, history suggests that the structural changes from AI are likely not priced in.

Investment Community tends to underestimate the size of new markets. Source Morgan Stanley Research
Source: Morgan Stanley, Research Note: Cloud CAGR measured over 9 years as we do not currently estimate MSFT cloud revenue in CY27

How can ASX companies benefit from AI adoption?

Morgan Stanley identifies four categories of AI positioning for the adoption of AI that is available to companies.

1. Enablers

These are companies directly exposed to AI infrastructure. It could be the chips and machines required to run AI applications, or the data centres required to store the vast amount of information AI applications draw upon. “The scale of opportunity for enablers is huge” says Morgan Stanley.

2. Proven Innovators

Morgan Stanley says this category contains companies using AI tools to “drive relevant marketing, identify churn risk, improve customer support and automate manual processes”. Many companies are already well progressed in this area, using AI to innovate by developing existing and new products. These tend to be companies with a strong product development and an engineering culture.

3. Data owners

You would no doubt have heard that data is big business. It helps companies understand how consumers behave, what they like, but most important of all: What makes them want to buy more. 

More broadly speaking Morgan Stanley believes that data, that is, own, customer, and industry based, “can help companies make better decisions on their own or in their customers' business”.

4. Labour savers

This is potentially one of the areas where AI is going to have the greatest impact. Worried about AI taking your job? Well, if you qualify as “white collar labour-intensive” then you should be, suggests Morgan Stanley.

“We expect a step change in labour efficiency across sales, customer success, support and engineering”, says the broker.

With the right data, AI tools can drive automation and help customers on a greater scale. In labour-intensive industries we expect material divergence in performance between effective AI adopters and peers.

What are the barriers to entry for ASX companies looking to adopt AI?

Morgan Stanley warns that the catch cry of “AI adoption”, no doubt likely to be bandied around by companies for many years, cannot be taken lightly by investors. There are significant barriers to entry with respect to integrating AI technologies into a business compared to the adoption of the internet, for example.

Want to start an internet business? This can be done by a very average person (i.e., you and I) in a few hours for little-to-no cost. Want to start a revolutionary AI company that’s going to change the world? I think you get my drift.

According to Morgan Stanley, the main barriers to entry for companies looking to adopt or develop AI technologies include:

  • Access to capital – “Ability to invest in capital intensive compute”

  • Ongoing costs - “We see significant variable compute costs associated with generative AI innovations”

  • Access to data – Preferably “proprietary data”

  • Organisational experience – “Ability to retain and hire specialist engineering talent”

Which ASX companies are most likely to benefit from AI adoption?

With the above in mind, Morgan Stanley notes the idea of their research report “is not to predict AI winners”, but rather “to think about what successfully harnessing the power of AI might look like for different business models”. Let’s look at Morgan Stanley’s top picks across each of the major AI adoption categories.

#1 ASX Enablers

Bad news Aussie investors, as far as Enablers go, “We believe the Australian market offers very limited depth” says Morgan Stanley. In fact, they refer clients to a separate report on global AI Enablers (perhaps the topic for another day!).

As for our “limited depth”, the ASX stocks most highly rated as Enablers by Morgan Stanley include: Data#3 (ASX: DTL), Dicker Data (ASX: DDR), Macquarie Technology Group (ASX: MAQ), and Nextdc (ASX: NXT).

DDR & DTL

  • The broker notes “generally positive outlooks” for each company, and that each is “supported by resilient (and in some instances accelerated) IT demand from thematics like digital transformation and now AI”.

  • They will play a “key role in enabling the adoption of AI in Australia” as suppliers of hardware and software (DDR), and services to assist in implementing AI tools and functionality (DTL).

NXT & MAQ

  • These are Morgan Stanley’s key data centre options, with the broker noting they will also play a key role in enabling the adoption of AI in Australia.

  • “Demand drivers behind the AI theme are robust, setting the stage for a multiyear structural  growth cycle”

  • “our bottom-up analysis suggests the Australian market will require up to +1.5GW of incremental power for data centres by 2030…this is our base case and CAGR of +13%”

#2 ASX Proven Innovators

Morgan Stanley shouts out Proven Innovators Breville Group (ASX: BRG). “We consider Breville a proven innovator as it manages to deliver an outsized impact from a patent portfolio that is materially smaller than global peers”

Breville Patent Portfolio. Source Morgan Stanley Research
Source: PatentSight. *Competitive impact relatively measures: i) Technology relevance (i.e., forward citations in competitors' artwork); and ii) Market coverage (i.e., the more international markets the patent applies to, the higher the market coverage).

#3 ASX Data Owners

Morgan Stanley highlights Life360 Inc. (ASX: 360) and Siteminder (ASX: SDR) as key Data Owners, but either could also have qualified as Proven Innovators.

360

  • “We see Life360 as having access to huge volumes of user data, from personal details to daily habits, driving patterns and behaviours…We expect the data insights to become more granular over time”

  • “Life360 is also already leveraging its data in AI applications”

  • “Longer-term we see significant potential in terms of both monetisation and user experience of consumers being served compelling offers.” 

SDR

  • “SDR has visibility into every product that its customers put into the market” 

#4 ASX Labour Savers

Morgan Stanley suggests the main Labour Savers to watch are Wisetech Global (ASX: WTC), Temple & Webster Group (ASX: TPW), SG Fleet Group (ASX: SGF), Fleetpartners Group (ASX: FPR), and IPH (ASX: IPH).

TPW

  • “Most areas in TPW will be materially disrupted by AI including customer care, operations,

  • product development, tech, back office”

  • “Offline retailers have limited opportunity to leverage AI given a large percentage of their cost base is in store staff and lease costs. As a result, we think TPW’s competitive advantage and value proposition will extend over offline peers”

WTC

(Note: WiseTech could also have slotted into the Proven Innovators category given substantial investment in R&D and product development over the last 5 years)

  • Further ongoing investment in AI will enhance WTC's core international freight forwarding market and also extend its reach into key adjacent markets such as customs, compliance, warehousing, and landside logistics”

  • “Harnessing AI will be key given the many complexities in the freight forwarding industry”

  • “We expect AI to assist with sales, support and customer success automation and analytics…improve developer productivity and result in more rapid product iteration at the same level of headcount.”

 

Written By

Carl Capolingua

Content Editor

Carl has over 30-years investing experience, helping investors navigate several bull and bear markets over this time. He is a well respected markets commentator who specialises in how the global macro impacts Australian and US equities. Carl has a passion for technical analysis and has taught his unique brand of price-action trend following to thousands of Aussie investors.

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