Morgan Stanley upgrades this education stock, says A.I. disruption concerns create an attractive entry point

Published Fri, May 12 20235:59 AM EDTUpdated Fri, May 12 20237:13 AM EDT

Concern that generative AI could hinder this education company is giving Morgan Stanley reason to get more bullish on shares. Analyst Omar Sheikh upgraded shares of Pearson to overweight from equal weight, saying in a Thursday note to clients that generative AI models should improve the company's value. PSO 1M mountain Pearson shares over the last month "We argue the value of Pearson's data and content will likely go up when combined with generative AI models," he said. "We expect evidence to support this to build from H2 2023. With the shares reflecting elevated disruption risk, we see an attractive entry point." So far this year, U.S-listed shares of Pearson have dropped 10.2%, tumbling 8.3% in May alone as concerns mount over the way generative AI can hurt education companies. Chegg's jaw-dropping decline earlier this month first highlighted the ways that ChatGPT is impacting these businesses, heightening fears over broader industry-wide shockwaves. Despite these concerns, Sheikh views generative AI as a value-creating feature for Pearson, adding that these models are no "substitute" to the company's content heavily embedded in institutions and protected through copyright. He wrote that "the value of accredited learning is unlikely to be disrupted by LLMs – as consumers will continue to value degrees, professional and other learning certifications as paths to economic and social advancement." On the testing front, Sheikh expects the company to use AI technology to improve the its testing services and even improve margins. He also sees no current substitute for the accreditation Pearson provides for K-12 learnings. Morgan Stanley trimmed U.K.-listed shares of Pearson to £9.20, or 920 pence, from £9.40, or 940 pence per share. The adjustment implies about 13% upside from Thursday's close. "The pace of improvement of generative AI models is the most notable risk we see, particularly for US college courseware and exam preparation, but we think Pearson is well equipped to harness the power of generative AI to combat this risk and to create value for its shareholders," Sheikh said. — CNBC's Michael Bloom contributed reporting