UK investors are starting to sit up and take notice of the deep potential for growth in London’s AI-focused small-cap shares. Although the UK’s listed arena is no match for the mega funding rounds being chalked up in a private setting in the US, some of London’s AI companies are doing very interesting things and have exciting growth prospects.
We explained last week that several AI stocks, including GenIP, Cel AI and Sealand Capital Galaxy, deserved higher valuations. Today, we outline why GenIP looks to be the pick of London’s high-risk/reward artificial intelligence small-cap shares.
GenIP has developed Generative AI models that help Technology Transfer Offices (TTOs) assess the commercial viability of new technological discoveries. With companies like Google and Yahoo starting life as university technology before commercialisation, technology transfer can be a vital revenue source for universities and other research institutions.
However, around 80% of promising technical discoveries never achieve their full market potential due to the challenges of adequately assessing technology and bringing it to market. This is where GenIP comes in.
GenIP has identified a clear pain point for Technology Transfer Offices and corporate research institutions: They are missing lucrative commercial deals because they lack the capabilities to analyse the market opportunity properly. GenIP’s Generative AI analytics services are solving this problem by helping research organisations cost-effectively assess whether their technological discoveries have commercial legs in the real world.
What sets GenIP apart from other London-listed AI firms is the validation of its business model and proven traction in its target market. Although still in its early stages, the company has already announced orders for its Generative AI analytics services at a pace that suggests annual revenues of around £1m.
One may dare to assume this run rate increases as the company deploys funds from its recent IPO in marketing and sales.
Having provided a means of deducing a very rough earnings/sales-based valuation, there’s enough data to conclude that GenIP offers investors good value compared to the broader AI space.
AI valuation explosion
According to filings in the US, Elon Musk’s xAI raised $6bn recently at a valuation of $45bn. The Wall Street Journal reported that xAI told investors that it is on track for revenues in the region of $100m in 2024. These two numbers infer a very rough 450x revenue multiple for the round, although the actual revenue multiple could be very different as the figures aren’t publicly available.
Anthropic, the owner of Claude, the emerging leader in the field of large language models, secured another $4bn investment from Amazon in November. The deal reportedly valued the Anthropic at $40bn.
With Anthropic revenue set to hit $1bn this year, Amazon’s investment was completed on a multiple of 40x revenue.
Of course, these funding rounds represent the very pinnacle of Generative AI deal flow in a private setting, and inferences to London-listed small-cap AI shares aren’t straightforward. That said, increasing enthusiasm for listed AI-related shares globally is starting to be felt in London.
Nowhere is this enthusiasm felt more than in US-listed Palantir, an AI-powered data software company that provides businesses with solutions to improve operations. After rallying over 300% year-to-date, Palantir trades at 57x its FY2024 revenue guidance of $2.8bn.
Share price moves of this magnitude are starting to be observed in London’s riskier small-cap market. Sealand Capital Galaxy, for example, has gained over 900% in a month.
GenIP valuation
Using a base case of £1m GenIP revenue and applying a similar multiple to those observed in the fundraises of Anthropic, Xai, and OpenAI, GenIP would have a valuation target in the range of £40m—£450m. This compares to GenIP’s current £4m market cap. Direct comparisons here are fraught with constraints, but comparing and applying similar valuation multiples highlights just how undervalued some UK-listed technology shares are.
The base case £1m revenue may prove to be conservative. GenIP has barely scratched the surface of a target market of over 4,000 universities. An upcoming marketing campaign utilising IPO funds should significantly increase the annual revenue run rate.
Should GenIP’s marketing activities prove successful and the company achieve £3m revenue this year, applying the same revenue multiples observed in recent US funding rounds would infer a valuation of £120m—£1.35bn. Of course, the upper end of this range is fanciful, but it does demonstrate the valuations some institutional investors are prepared to pay to secure holdings in the world’s most exciting AI companies.
The opportunity in GenIP is further highlighted by comparisons to other players in the London AI space. Sealand Capital Galaxy’s news of a plan to break into the AI space has attributed it a valuation above £10m.
However, investors will note that Sealand is yet to complete its investment in Evoo AI, an AI firm with proprietary models that provide insights into the luxury goods market. There are also questions about how the investment will be funded.
These uncertainties make Sealand no less an exciting opportunity, but the recent rally in shares SCGL shares highlights more profound value elsewhere in the sector, particularly in GenIP.
Given that GenIP has a clearly defined market and is already gaining traction with orders, it puts it far ahead of other London-listed AI firms that have yet to launch products or announce any meaningful order flow or user numbers.