European technology in the kingdom of the Magnificent Seven | Financial markets

The tech festival isn’t just celebrated in the United States, as its giants wrap up their presentation of last year’s results this week. Europe is also seeing progress in these values, with its Euro Stoxx 600 Technology Index showing growth of 8% for the year after closing last year with a gain of 31%, well ahead of the Euro Stoxx 50 Index (23%), although still below the US Nasdaq. which recorded a revaluation of 43%.

Comparison of European and American technology companies…

The tech festival isn’t just celebrated in the United States, as its giants wrap up their presentation of last year’s results this week. Europe is also seeing progress in these values, with its Euro Stoxx 600 Technology Index showing growth of 8% for the year after closing last year with a gain of 31%, well ahead of the Euro Stoxx 50 Index (23%), although still below the US Nasdaq. which recorded a revaluation of 43%.

Comparing European and American technology companies is reminiscent of fables about giants and dwarfs. The seven largest US tech companies – the so-called Magnificent Seven (Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia and Tesla) – have a market value of 11 trillion euros, compared with 700 billion euros for the European industry. .

Data from Dutch hardware maker ASML and European software giant Germany’s SAP are at the European forefront of technology, with the stock market up nearly 20% this year. “ASML tripled its orders in the final quarter of last year from clients such as Intel, Samsung and Taiwan Semiconductor. The company has addressed inventory issues in recent months and is expected to benefit from a recovery in China, which accounted for 39% of sales at the end of the year,” explains Joaquin Robles, an analyst at XTB. And he adds: “As for SAP, last week it beat expectations and announced a restructuring that will affect 8,000 employees to develop and invest in artificial intelligence (AI).”

But the good news in the stock market was not widely shared, with semiconductor companies such as ST Microelectronics and Infineon starting the year with their stock market prices falling 9.8% and 9% respectively. Those involved in communications technology also saw uneven performance, with Nokia shares rising 5% and Ericsson shares falling almost 11%. Thus, the experts interviewed draw a differential line between technology sub-sectors for 2024.

Wolf von Rothberg, equity strategist at J. Safra Sarasin Sustainable AM, points out that “in technology, we are more cautious on consumer companies (telephony, computers) as they are more susceptible to slowing retail demand in the coming quarters.” – he explains.

Goldman Sachs goes into detail about this industry differentiation, prioritizing those with the greatest opportunity for growth in 2024. Overall, these experts see AI, auto industry digitalization, and electrification as drivers of demand for tech companies in the coming years. “We continue to take a selective approach to European semiconductors, where we see trends vary across end markets (e.g. automotive vs. consumer) and applications (e.g. advanced vs. legacy), and we are further reaffirming our view. Be wary of telecommunications technology. Our stock recommendation (Sell for Ericsson) reflects our expectation of wireless market weakness in the coming years,” they conclude.

For his part, Luca Colussa, head of quantitative equity research at Generali Investments, is cautious about the future of the sector, given the levels already reached. “Following this January rally, there is no doubt that the sector’s valuation is not cheap, with P/E ratios relative to the European market reaching 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. The ability to take advantage of advances in artificial intelligence remains important,” he explains.

In a difficult year for the stock market as a whole, the choice of securities will be decisive, and in this sense, technology companies also have different expectations, analysts say. ASML is the third most valuable company in the European market with a capitalization of 326 billion euros, second only to Novo Nordisk and Louis Vuitton. The global leader in lithography machines, which play a key role in printing advanced chips, offers strong revaluation forecasts. Alvaro Anton, head of Abrdn in Spain and Portugal, emphasizes that “ASML has a monopoly on the main machines for the production of advanced chips that will contribute to the current and future revolution in computing, especially in the field of artificial intelligence.” This expert’s concern is the geopolitical tensions surrounding China and the resulting chip wars.

Goldman has a buy rating on the stock and says “a significant number of new semiconductor foundries will require ASML tools, which we believe supports strong growth prospects in 2025 and a return to order growth throughout the year.” JP Morgan is also optimistic about the future of value: “Strong order inflows in the fourth quarter of 2023 indicate that revenues and earnings in 2025 will be much higher than in 2024, and that strong orders are supporting forecasts by 25″, indicate They.

German software giant SAP is an obvious buy option for Barclays, which raised its price target to €175 last January (it is quoted at €165). The British bank highlights the company’s restructuring and pivot to artificial intelligence, as well as its favorable performance.

Another top value is semiconductor maker ST Microelectronics, which Goldman offers to sell with a price target of €37, down from currently trading at €40. “While we believe the recovery in consumer demand is supporting the company, we see pressure on earnings, and its auto business could come under pressure from the recent sales outlook of its autonomous driving rival Mobileye,” they point out.

For their part, Barclays analysts cut their target price for ST Micro to €46 as they expect earnings per share to fall and turnover to fall. “Given China’s vulnerability, it is likely to be at greater risk of falling revenues sooner than its EU peers,” they said. For Barclays and Goldman experts, the most interesting alternative to semiconductors is Infineon. “We prefer Infineon (with more references) because it has less industrial exposure, which we believe is the worst end market at the moment. In our opinion, Infineon’s strategy is also less demanding and risky,” Barclays points out. Goldman expects the share price to reach 43.5 euros over the one-year horizon (currently trading at 33.7) due to strong demand for the automotive business. But they also indicate that potential acquisition or merger premiums in the semiconductor sector have been lost due to hurdles posed by U.S. and Chinese regulators.

In the telecommunications technology space, expectations are not the most favorable, although they favor Nokia to the detriment of Ericsson. “We see a more favorable risk/return profile for Nokia (neutral) compared to Ericsson (sell), given that Nokia has less exposure to the broader wireless market, which has seen significant cost reductions in 2023. 24% discount compared to Ericsson,” explains Goldman. At Barclays, they give Nokia a €3 price target (it currently trades at €3.33) and recommend a lighter weight: “While we were impressed by Nokia’s cost reductions and progress made in restoring gross margins, we believe the downward cycle for telecommunications equipment suppliers are far from finished,” they explain. Ericsson is pessimistic about the dynamics of its multiples, with the target price reduced to 50 Swedish kronor (trading at 57).

Geopolitical risk also looms over the sector and how the trade and technology war between the United States and China could affect European firms’ sales to the Asian giant. We’ll have to wait until the November presidential election in the United States to find out whether rising tensions with China will lead to new restrictions on the tech industry.

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