Warren Buffett didn't become one of the most successful investors in history by owning growth stocks that carry outsize risk. Rather, he helped transform Berkshire Hathaway into a financial powerhouse by taking positions in globally recognized companies that generate steady cash flow.
One of Buffett's favorite industry sectors throughout his career has been financial services. By contrast, the Oracle of Omaha has rarely dabbled in the technology industry. For this reason, Buffett carries very little exposure to Wall Street's newest favorite opportunity, artificial intelligence (AI).
In my opinion, Apple and Amazon represent Berkshire's most direct exposure to AI. However, one of Buffett's longest-standing positions has been quietly transforming part of its business to feature AI -- and I think it's going overlooked.
Below, I'll break down how financial services firm Moody's (MCO 0.16%) could be a lucrative AI play hiding in plain sight.
NYSE: MCO
Key Data Points
How is Moody's using AI?
Moody's specializes in risk assessment services, namely by building credit models and publishing research reports revolving around different types of securities and businesses. The obvious takeaway about the business is that Moody's analyzes loads of financial data points and has to synthesize this information in a way that is digestible for its clients -- namely, financial institutions such as investment banks or private equity firms.
The advent of generative AI helps bring a new layer of automation to workflows that require immense levels of data computation. For Moody's specifically, the company is working closely with Microsoft and OpenAI to build more robust analytical capabilities.
For example, the company launched the Moody's Research Assistant, a chatbot that monitors important variables including ratings changes, real-time events, and macro or company-specific industry trends that can help build a more comprehensive picture for financial analysis, especially as it relates to credit risk assessments.
While these are interesting developments in Moody's product suite, I'm particularly encouraged by the company's commitment to its AI roadmap. Back in January, Moody's doubled down on its AI ambitions by announcing that it is acquiring CAPE Analytics, a company specializing in "geospatial AI analytics."
The addition of CAPE Analytics to Moody's existing AI portfolio should help the company make inroads in other pockets of risk assessment, such as certain areas of insurance as it pertains to hazardous weather.
To me, these innovations are helping Moody's transition from a financial database to more of an AI analytics platform -- thereby providing the company with additional value propositions as it competes with the likes of FactSet Research Systems, S&P Global, and Morningstar.
Image source: The Motley Fool.
Is Moody's stock a buy right now?
The tables below illustrate trends between revenue and free cash flow for Moody's over the last few years. I see it as an encouraging sign that the company's top-line and profitability profile are rising in tandem, and for the most part, the growth appears to be steepening.
MCO Revenue (Quarterly) data by YCharts
What's even better is that when Moody's reported earnings for the third quarter back in October, the company's guidance for revenue, operating profit margins, free cash flow, and earnings per share (EPS) all rose -- signaling that demand for its services remains strong and the company's investments in its new innovations are bearing fruit.
The one thing I will note about Moody's valuation is that the stock has gotten a little pricey. The stock currently trades for roughly 37 times forward earnings, much higher than the average forward P/E of the S&P 500 -- which hovers around 24.
AI is still a nascent part of Moody's business, but the early indicators point to success for company. That makes the stock a terrific opportunity to buy hand over fist. Investors with a long-run horizon who are looking for more under-the-radar AI opportunities may want to consider a position in Moody's right now.
