Morgan Stanley Sees Promise in European AI Stocks Despite Recent Volatility
Despite the recent market downturn affecting some of the biggest names in the artificial intelligence sector, Morgan Stanley remains bullish on several European stocks positioned to benefit from the AI boom. The investment bank sees the recent pullback as a temporary correction, similar to a "growth scare" in the mid-1990s software market, and believes these stocks are poised for significant growth in the coming months. Their "European AI shopping list" includes companies across various sectors, from semiconductor equipment and data centers to software and healthcare, all expected to benefit from the AI revolution. These "AI winners", as Morgan Stanley calls them, have already delivered impressive returns, averaging a 44% jump since January 2023, significantly outperforming the 14% gain of the MSCI Europe benchmark.
Key Takeaways:
- Morgan Stanley is optimistic about European AI stocks despite recent market volatility.
- The bank believes the market downturn is a temporary correction and these stocks are poised for growth.
- Their "European AI shopping list" includes companies across several sectors, including semiconductors, data centers, software and healthcare.
- These stocks have already delivered strong returns, outperforming the broader European market.
Diving Deeper into Morgan Stanley’s European AI Picks
Morgan Stanley has identified four overweight-rated stock picks to capitalize on the AI theme:
ASML: The Semiconductor Equipment Giant
ASML, a Dutch chip machine maker, holds a monopoly in leading-edge lithography equipment, a crucial component for producing high-performance chips used in AI applications. Analysts highlight ASML’s unique position in the market, as it is the only company capable of producing extreme ultraviolet (EUV) lithography tools, essential for the production of leading-edge chips.
ASML’s growth trajectory is fueled by strong demand from key clients like Nvidia, a leading AI player, and TSMC, a major semiconductor manufacturer. ASML is poised to benefit further from TSMC’s investment in N2 technology, expected to power various Apple products starting next year.
Morgan Stanley has a target price of 1,000 euros for ASML, signifying a potential upside of over 27.5%.
Segro: The Data Center Landlord
Segro, a British real estate investment trust (REIT), is positioned as the "landlord of Europe’s largest cluster of data centers." Their £18 billion portfolio houses 34 data centers, generating 9% of the group’s rent. Segro’s focus on data centers aligns perfectly with the growing demand for data storage and processing capabilities, essential for AI advancements.
Segro has ambitious expansion plans, with a pipeline of projects expected to bring in £200 million in future rent over the next decade. This strategic growth trajectory reinforces their position as a key player in the burgeoning data center market.
Morgan Stanley has a target price of 1,050 pence for Segro, suggesting a potential upside of around 18.6%.
SAP: The Software Solutions Powerhouse
German software solutions giant SAP is well positioned to capitalize on the emerging generative AI market. SAP’s vast business data and integrated "business AI functionality" make it a strong contender in the AI software market.
Morgan Stanley expects significant upside for SAP’s margins, driven by increased efficiency and the expansion of its cloud gross margins. This strategic focus on cloud services aligns with the industry trend toward cloud-based AI solutions.
Morgan Stanley has a target price of 224 euros for SAP, indicating a potential upside of approximately 18.3%.
Merck KGaA: The Materials Provider for AI Hardware
German science and technology firm Merck KGaA (EMD Group in the U.S. and Canada), is poised to benefit from the increasing demand for materials used in AI semiconductor manufacturing. Their electronics business, which contributes 12% to the company’s overall sales, is set to grow between 7% and 10% in the medium term.
Merck’s focus on complex materials for AI semiconductor manufacturing highlights their strategic positioning in the rapidly evolving AI hardware landscape. As AI chips become more sophisticated, the demand for specialized materials will increase, benefiting companies like Merck.
Morgan Stanley has a target price of 200 euros for Merck KGaA, signifying a potential upside of around 20%.
The Future of AI and European Investment
Morgan Stanley’s bullish stance on European AI stocks underscores the growing importance of this technology and its impact on various industries. As AI continues to evolve and develop, companies positioned to capitalize on its advancements are likely to see significant growth.
The European AI market is experiencing a surge in investment, with government initiatives and private funding fueling innovation. This positive environment creates opportunities for European businesses to become leaders in the global AI landscape.
With a strategic approach and a keen eye on the transformative potential of AI, these European companies are well-positioned to ride the AI wave and deliver strong returns for investors. Morgan Stanley’s optimism about these stocks reflects the broader sentiment that AI is poised to revolutionize various industries, driving strong growth for companies at the forefront of this technological revolution.
