These Top Tech Stocks Can Stand Up to AI Risks

The stock market has cooled for stocks perceived as disrupted by artificial intelligence.

Why it matters: Fears over whether AI will disrupt a variety of sectors have triggered big selloffs. Morningstar equity analysts investigated 132 companies to determine whether that’s the case, and they concluded that AI is not a universal destroyer. The team thinks investors should sort through the wreckage and find newly cheap companies with enduring competitive advantages.

Eric Compton, director of equity research for the technology sector at Morningstar, tells you where to look.

9 Questions on Sectors That Can Defend Against AI Disruption

1. Can you briefly explain what moats are and how Morningstar analysts use them to rate companies?
2. Your team reviewed more than 130 firms under coverage that appear at-risk to the AI disruption. What surprised you about the results?
3. We’re going to talk about three sectors your team believes can defend themselves. First up is cybersecurity. Why?
4. What is a top pick from this sector according to Morningstar analysts?
5. Many investors have dumped their software stocks, but Morningstar thinks that’s an overreaction. Can you talk about why design software looks resilient?
6. Which top stock here should investors consider?
7. The third sector is financial infrastructure and data. Why do you think this group would benefit from AI?
8. What’s a top cheap stock from this sector?
9. What’s the takeaway for investors looking for opportunities within AI-related selloffs?

Key Quote on Morningstar Analysts Examining the AI Disruption

There was a lot of healthy debate behind the scenes. I think we are trying to do the best job we can to take into account these changing technology paradigms and how they might affect these companies. So, overall, I think it was a healthy process and probably maybe led to a little more change than I would’ve expected going into it.

Eric Compton, director of equity research, technology, Morningstar

The Takeaway: Investors should be selective when looking for opportunities after AI-related stock selloffs. Morningstar’s technology sector director says firms within cybersecurity, design software, and financial infrastructure and data showed they could withstand threats from the evolving technology. The team downgraded the moats of some enterprise software-as-a-service companies to narrow from wide and trimmed their fair value estimates. However, Compton says there are still opportunities even with the heightened risk. Morningstar analysts think that the market selloffs probably went too far.

More From Morningstar on Economic Moats and AI Disruption

One economic moat source stood out during Morningstar analysts’ extensive review of more than 130 companies. Compton says the network effect was the most resilient moat source. The team does not think AI will change the power of networks because the strength was never about the technology per se. It’s about coordinating all the players within the network. The analysts developed a proprietary scoring framework that took into account seven key dimensions for thinking about moats in an AI world.

Read the Moat Ratings Guidebook Amid AI Disruption

Watch Compton discuss with Morningstar’s Sarah Hansen which stocks are most at risk to AI disruption. A bonus episode of _The Morning Filter_takes a deep dive into the cybersecurity sector.Co-host Dave Sekera talks with Morningstar’s Malik Ahmed Khan about why the industry is poised to benefit from the AI disruption.

Securities Mentioned in This Episode

Cloudflare NET

CrowdStrike CRWD

Synopsys SNPS

Cadence Design Systems CDNS

Bentley Systems BSY

Dassault Systèmes SE DSY

Moody’s Corp MCO

S&P Global SPGI

Fair Isaac Corp FICO

Salesforce CRM

Oracle ORCL