The tech festival is not only celebrated in the US, now its giants are presenting last year's results this week. Europe is also celebrating the improvement in these values and its Euro Stoxx 600 technology index, after ending last year with gains of 31%, shows an increase of 8% for the year, although it outperforms the Euro Stoxx 50 (23%). Below the US Nasdaq, it posted a 43% revaluation.
A comparison of European and American technology companies…
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The tech festival is not only celebrated in the US, now its giants are presenting last year's results this week. Europe is also celebrating the improvement in these values and its Euro Stoxx 600 technology index, after ending last year with gains of 31%, shows an increase of 8% for the year, although it outperforms the Euro Stoxx 50 (23%). Below the US Nasdaq, it posted a 43% revaluation.
Comparisons between European and American tech companies evoke myths of giants and dwarfs. The seven largest technology companies in the United States – the Magnificent Seven (Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia and Tesla) – have a market value of 11 trillion euros, compared to 700 billion euros for the European industry.
European leaders in data technology include Dutch equipment manufacturer ASML and European software giant SAP, both of which have seen their stock markets rise as much as 20% this year. ASML has tripled the number of orders in the last quarter of last year with customers such as Intel, Samsung and Taiwan Semiconductor. In recent months, it is expected to resolve its inventory issues and benefit from the recovery in China, which represents 39% of sales at the end of the year,” explains XTB analyst Joaquin Robles. He adds: „For SAP, last week's results exceeded expectations and artificial intelligence (AI) announced a restructuring affecting 8,000 workers with the aim of creating and investing.”
But the good stock market momentum has not been generalized, with semiconductor companies such as ST Microelectronics and Infineon starting the year with 9.8% and 9% declines in their share prices, respectively. Those dedicated to communication technology have also had an uneven evolution: Nokia has risen 5%, while Ericsson has seen a drop of almost 11%. Hence, experts suggested drawing a distinct line between technology sub-segments by 2024.
Wolf von Rotberg, stock strategist at J. Safra Sarasin Sustainable AM, explains, „Within technology, we are very cautious with consumer companies (telephones, computers) because they are more exposed to a slowdown in retail demand in the coming quarters.”
Goldman Sachs elaborates on this sectorial differentiation to select those with the greatest potential for growth in 2024. In general, these experts see AI, digitization and electrification of the automotive industry as drivers of demand for technology companies in the coming years. „We continue to take a selective approach in European semiconductors, where we see different trends based on end markets (e.g. automotive and consumer) and applications (e.g. advanced and legacy), and further emphasize our view of being cautious about telecom technology. . . Our stock recommendations (to sell Ericsson) reflect our expectations of wireless market weakness in the coming years,” they conclude.
For his part, Luca Colusa, head of quantitative stocks at Generali Investments, is cautious about the sector's future, given the levels it has already achieved. „Following this January rally, the valuation of the sector is undoubtedly not cheap as relative price/earnings against the European market reached a two-decade high seen at the end of 2021. This means European tech companies should see revenue and profit growth in the coming quarters. Advances in artificial intelligence The ability to exploit remains vital,” he explains.
In a troubled year for the stock market as a whole, the selection of bonds will be decisive, and in this sense, tech companies also have different expectations, analysts say. ASML is the third most valuable company in the European market with a capital of 326 billion euros, behind Novo Nordisk and Louis Vuitton. This world leader in manufacturing lithography machines, the key to printing sophisticated chips, offers good revaluation forecasts. Alvaro Anton, president of Abrdn for Spain and Portugal, said, „ASML has a monopoly on the essential machines for manufacturing advanced chips that will drive the current and future revolution in computing, especially artificial intelligence.” This expert's concern is the geopolitical tensions surrounding China and related chip wars.
They recommend buying the stock from Goldman and argue that „a significant number of new semiconductor factories will require ASML equipment, supporting solid growth prospects through 2025 and re-accelerating orders throughout the year.” JP Morgan is also optimistic about the future of value: „The strong inflow of orders in the fourth quarter of 2023 indicates that revenues and profits in 2025 will be higher than in 2024, and strong orders contribute to forecasts for 25. „, they note.
German software giant SAP is an obvious buy option for Barclays, which last January raised its target price to 175 euros (it was listed at 165). In addition to its favorable multiples, the British bank is focusing on corporate restructuring and artificial intelligence.
Another value leader is ST Microelectronics, a semiconductor maker under the Goldman Sell banner, with a price target of 37 euros while it is now trading at 40 euros. „While we believe the consumer recovery is supporting the company, we see pressure on margins, and its automotive business may be pressured by recent sales opportunities from its autonomous driving competitor, Mobileye,” they note.
For their part, Barclays analysts cut ST Micro's target price to 46 euros because of lower earnings per share and lower turnover. „China's earnings risk falling faster than those of its EU rivals, given its exposure,” they note. For experts at Barclays and Goldman, the most interesting alternative in semiconductors is Infineon. „We like Infineon (with an overweight advisory) as it has low industry exposure, which we believe is currently the underperforming end market. In our view, Infineon's strategy is under-demanded and risky,” they note from Barclays. At Goldman, they expect a share price of 43.5 euros (now trading at 33.7) on the one-year horizon due to strong demand for its auto business. But they also note that potential acquisition or merger premiums in the semiconductor industry have been lost due to restrictions imposed by US and Chinese regulators.
Within telecoms, expectations are less favorable, although they favor Nokia to the detriment of Ericsson. „We see a more favorable risk/reward profile for Nokia (Neutral) compared to Ericsson (Sell) as Nokia has less exposure to the broader wireless market, which has seen a significant reduction in costs in 2023. Additionally, it is listed at a 24% discount compared to Ericsson,” they said. Goldman explains. At Barclays they give Nokia a target price of €3 (it's currently trading at €3.33) and an underweight recommendation: „While we're impressed by Nokia's cost-cutting and progress in gross margin recovery, we believe a downward cycle is far from over for telecom equipment suppliers.” ,” they explain. At Ericsson they are pessimistic about the evolution of their rates, with the target price reduced to 50 Swedish crowns (it is trading at 57).
The sector also has geopolitical risk, as well as how the trade and technology war between the US and China could affect European companies' sales to Asian companies. We'll have to wait for the US presidential election in November to see if heightened tensions with China will set new limits on the tech sector.
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