Morgan Stanley Say These Stocks Are 'AI Proof'

The surge in chatter around sector disruption from AI appears to have forgotten about one area.

• Sports assets and sports right shares provide a subsector that AI will struggle to damage.

• The revenue derived from sponsors and event sales relies on live events with real people.

• F1 and Endeavor/WWE provide good stock specific examples that could perform well in coming years.

The craze in AI stocks, fuelled in part by the Nvidia rally post earnings last month, has led to a large amount of speculation on industry disruption.

In areas from law to traditional finance, the usage of AI has the potential to make certain functions and job roles obsolete. Not only that, but entire businesses could find it tough to survive in coming years.

On the face of it, it’s difficult to think of an area that is more immune to the influence of AI. Yet as we read through a note from Morgan Stanley, something caught out eye.

We’re talking about…sports stocks

Sports assets and sports rights shares aren’t usually a big area of focus for investors. It’s a fairly niche subset of consumer discretionary (?) but one that does contain a wide variety of companies.

When you think about it in more detail, this niche could be well defended against the rise of AI. For example, take Endeavor Group Holdings, which owns the UFC.

The UFC generates the vast majority of the $6bn+ revenue stream for the company. In the latest quarterly results, it commented that:

“(UFC) revenue was up by 19.1%, compared to the first quarter of 2022. Growth was primarily driven by an increase in media rights fees, sponsorships, commercial pay-per-view, and event-related revenue at UFC, primarily resulting from an additional Pay-Per-View event in the quarter, as well as more events with live audiences.”

All of these drivers are due to the in-person fights being a success. Over the years, the sport has been set alight by charismatic figures such as Connor McGregor.

Can AI provide a revenue stream of a similar kind with virtual fights with digital characters? Not at all. Would the sponsorship and media rights income be as high if it didn’t involve the likes of Israel Adesanya, Dustin Poirier and others? No.

It’s a bold call, but a stock like Endeavour could truly be one of the few AI-proof stocks.

Specific ideas we like

Now we’ve established that sports stocks area a good area to look towards, it becomes a question of which specific stocks to purchase.

We used Endeavour as an example, which would have earned an investor a profit if bought a year ago (see below chart). Yet there are some other performers that have really turned on the afterburners recently:

World Wrestling Entertainment

WWE shares have surged 65% over the past year. In the past couple of months, the planned merger between Endeavor and WWE is set to go ahead. Both stocks still openly trade, but when the time comes for a single ticker, it could definitely be worth looking at picking up some exposure here.

Not only does it provide the benefit of Endeavour that we’ve mentioned above, but you also get exposure to the ‘constructed’ world of WWE. The global appeal of the live events (take a look at the recent trip to the Middle East) is another tick in the box of something that AI simply can’t replicate.

Liberty Formula 1

F1 is another stock that we feel has good upside in coming years. The business generated $381m in revenue in Q1, despite only having two races during this period. This is put down to:

“Primary F1 revenue increased in the first quarter with growth across media rights, race promotion and sponsorship. Media rights revenue increased due to continued growth in F1 TV subscription revenue and increased fees under new and renewed contractual agreements. Race promotion revenue grew due to contractual increases in fees, and sponsorship revenue increased due to the recognition of revenue from new sponsors and growth in revenue from existing sponsors.”

What’s clear here is that F1 makes money from sponsors wanting to be involved in the races. As long as the business hosts REAL races with REAL drivers, this should continue to grow revenue and profits. AI just doesn’t factor into the equation.

Risks to be aware of

Within the sports bracket, we’re most cautious about sports broadcasters/networks of the live events. We’re already seeing the start of a pivot from major tech brands such as Amazon and Apple into getting a piece of the sports action. Note the two below example headlines from the past year:

Given the power and budget behind these tech names, traditional broadcasters could lose out in the bidding war to show the likes of F1 to customers.

Therefore, the risk in this space isn’t so much from AI, but from other companies trying to muscle in on the profits.

Regardless of your personal view of AI, it’s going to create winners and losers in the stock market. We feel that holding some sports stocks provides a nice hedge against such disruption going forward.