AI and Economic Moats: Which Stocks Are Most at Risk?
The opportunities created by the rapid emergence of artificial intelligence technologies have come with growing uncertainty among investors about the disruption long-dominant companies might face. From software to insurance to shipping and beyond, the concern is that AI will lower the barriers to entry and erase the established competitive advantages that protected profit margins and fueled long-term growth.
With this in mind, Morningstar’s equity research team took a deep dive into the impact of AI across 132 companies in the technology and technology-adjacent sectors. The result was a series of major changes to their assessment of the
for roughly 40 major stocks. In most cases, the threat of AI led to moat rating downgrades, which came with reductions to the of many stocks.
Eric Compton, director of equity research for technology for Morningstar Research Services, explains how our analysts are thinking about the disruptive technology—from switching costs, to valuing intangible assets like computer code, to the insulating power of network effects.
Winners and Losers In the AI Race
The persistent theme for a post-AI world? “Predicting the winners and losers has become harder, and uncertainty has increased,” Compton says, especially when it comes to the outlook for companies over the next decade or two. “One of the key drivers of this was to try to sort through that.”
Compton says that for the most part, downgrades were concentrated in the enterprise software, IT services, and payroll sectors. For a firm like Workday WDAY, AI’s threat to the application layer, or user interface, resulted in a moat downgrade. Other notable downgrades include Adobe ADBE, Salesforce CRM, and Automatic Data Processing ADP.
On the other hand, certain semiconductor design software firms, like Synopsys SNPS, are poised to benefit as AI gains steam. “We think AI is a positive demand vector for these companies,” Compton says. Network effects (the stronger competitive advantage that comes with a larger customer or user base) may help offset AI-related risks for firms like Booking Holdings BKNG or the major stock exchanges.
Cybersecurity firms also proved more insulated from the threat of AI. For instance, Morningstar analysts upgraded their moat rating for Cloudflare NET, based on their analysis that AI may actually increase demand for its services.
The Bottom Line for Investors
Compton emphasizes that there are still opportunities for investors, even as AI puts pressure on once-wide economic moats. Some downgraded firms still look undervalued, and not all incumbent firms will lose out to AI upstarts. “It is harder to sort the winners and losers, but it doesn’t mean there won’t be winners among the incumbents, even among the downgraded firms,” he says.
