In this article, we discuss the 15 best European AI stocks according to Morgan Stanley.
There are several ways that investors are approaching the artificial intelligence (AI) boom that has been sweeping global markets since the end of 2022. The most obvious bets have been placed in sectors like semiconductors, software, and biotechnology, at least that is what investors in the United States have been up to. However, the habits of their European counterparts seem a tad different. Across the pond, stock pickers have been making bull calls on more established names to ride the AI wave, namely the utilities, commodities, and professional data providers, among others. Economic experts are describing this as the next phase of investments in the AI universe.
For example, Bernie Ahkong, an analyst at UBS, recently noted that the first phase of AI was interest towards chipmakers (read more about this by accessing 33 Most Important AI Companies You Should Pay Attention To). In the second phase, investors moved towards the industrial companies (read more about this by accessing 20 Industrial Stocks Already Riding the AI Wave) which actually supply the components to the data centers. The present tilt towards utility and power firms is quite possibly the third phase of this AI focus. Analysts at investment bank Morgan Stanley echo these sentiments. In a recent investor note to clients, released last week, these expert stock pickers underlined that even though the chaos around prominent AI firms has somewhat subsided, an AI rumbling in Europe is just about to begin. They attribute it to historical similarities to the mid-1990s, just before the internet craze.
According to Morgan Stanley analysts, European semi stocks are experiencing a tactical correction and should make new highs in the coming months. A basket of these equities, handpicked by these experts, and nicknamed AI winners, has returned close to 45% on average since January 2023, the beginning of the AI revolution. These firms, some of which are discussed in detail below, have outperformed the 14% jump recorded by the MSCI Europe benchmark, per the research. One indication of this is the demand for data centers. Kevin Restivo of CBRE recently highlighted that demand for data center space in Europe is set to outstrip delivery of new stock for the third straight year and AI demand will exacerbate the issue.
Our Methodology
For this article, we selected companies based in Europe who have been benefiting from the AI boom. An important investor note by investment bank Morgan Stanley on European AI stocks formed the basis for this list. These stocks are also popular among hedge funds. Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).
A futuristic datacenter with servers and high-tech equipment, signifying the company’s cutting-edge digital technology.
Best European AI Stocks According to Morgan Stanley
15. Infineon Technologies AG (OTC:IFNNY)
Number of Hedge Fund Holders: N/A
Infineon Technologies AG (OTC:IFNNY) designs, develops, manufactures, and markets semiconductors and semiconductor-based solutions worldwide. Even as geopolitical tensions and rapid industry innovation hinder the growth path of the firm, there are growth catalysts like silicon carbide production and AI power business that are driving bullish sentiment towards the firm for the next two years. The company, which often goes under the radar of chip investors, has a thriving AI power business. Latest earnings reveal that the sales for the AI segment of the firm will double by next year to over €400 million.
Analysts expect Infineon Technologies AG (OTC:IFNNY) to achieve EPS growth of 17% in the next fiscal year and 26% in the year after that, with revenue growth of 9.5% in the former and 12% in the latter. The firm is also working on the development of digital tools, linked to AI, that enhance resilience against external factors like geopolitics and natural disasters.
14. EDP, S.A. (OTC:ELCPF)
Number of Hedge Fund Holders: N/A
EDP, S.A. (OTC:ELCPF) engages in the generation, transmission, distribution, and supply of electricity in Europe, South America, North America, and internationally. It is based in Portugal. One of the reasons why this stock is attractive as an AI play is that it is performing well across most indicators even as power prices fall, making it an attractive choice to de-risk a growth-heavy portfolio. Earnings for the firm have continued to trend upwards despite low prices, the company has a low PE ratio, and is trading at a 34% discount compared to historical multiples. It also has an attractive yield and an unblemished payout history. The firm could work with regulators to increase payouts as it looks for fresh capital to fund AI infrastructure build.
UBS analyst Bernie Ahkong is bullish on EDP, S.A. (OTC:ELCPF), recently noting that one of the most interesting ways of playing the AI boom was with European utilities. This forecast seems grounded in reality. The International Energy Agency estimates that the total power consumption from data centers will be above 1,000 terawatt hours (TWh) by 2026, up from 460 TWh just two years ago.
13. Glencore plc (OTC:GLNCY)
Number of Hedge Fund Holders: N/A
Glencore plc (OTC:GLNCY) is a United Kingdom-based firm that engages in the production, refinement, processing, storage, transport, and marketing of metals and minerals, and energy products. Commodity stocks like Glencore have fallen behind the obvious names during the AI rat race, their importance in the overall equation notwithstanding. Even as iron futures undergo a blip, copper demand has surged due to the electrician and AI trends sweeping the business world. Copper is an important raw material in AI data center build. Glencore reported a copper production of more than 1 million metric tons in 2023.
Glencore plc (OTC:GLNCY) is in a prime position to capitalize on rising copper demand. According to commodity trader Trafigura, copper demand linked to data centers and AI could add up to one million tons by 2030. This, in turn, would lead to supply deficits, driving prices upwards. The copper boom sits at the heart of the AI craze.
12. Fortum Oyj (OTC:FOJCY)
Number of Hedge Fund Holders: N/A
Fortum Oyj (OTC:FOJCY) engages in the generation and sale of electricity and heat in the Nordic countries, Sweden, Germany, the United Kingdom, the Netherlands, and internationally. It is based in Finland. The company has not had the best of business years. Markus Rauramo, the CEO of the firm, said during the first quarter earnings call that decarbonization was driving power demand, providing his company with growth opportunities in the long term through investments in new clean energy production. Per the CEO, one example of this was the development of several sites across Finland by his firm for various industrial purposes, including data center build. These sites include Pori, Inkoo, Rauma, Orimattila and Nurmijärvi.
Fortum Oyj (OTC:FOJCY) is among the firms that are targeting possible deals with the government of neighboring Sweden as the latter tries to build 2,500 MW of new nuclear power by 2035. This endeavor could cost as much as $38 billion. The CEO of the firm has, however, warned that it is not feasible to invest in new nuclear power plants in the region due to the steady drop in power prices.
11. Iberdrola, S.A. (OTC:IBDRY)
Number of Hedge Fund Holders: N/A
Iberdrola, S.A. (OTC:IBDRY) is a Spanish firm that engages in the generation, transmission, distribution, and supply of electricity in Spain, the United Kingdom, the United States, Mexico, Brazil, Germany, France, and Australia. AI data centers have created a need for power that is likely to drive utility firms towards upgradation of their existing capacities to accommodate rising demand. This rise in demand for power due to AI can be explained by the fact that a ChatGPT, an AI-powered tool, query takes ten times more electricity than is needed to process a simple Google, a traditional search engine, query.
Iberdrola, S.A. (OTC:IBDRY) is likely to be one of the biggest beneficiaries of this boom. According to a recent study by investment bank Goldman Sachs, total data center power demand will go up from 400 TWh in 2023 to 1,100 TWh by the end of this decade. In other words, demand will nearly triple within the next five years. European utility firms, with a much healthier mix of renewables in their portfolios, will find it easier to accommodate this at cheaper rates than their fossilized American counterparts.
10. Roche Holding AG (OTC:RHHVF)
Number of Hedge Fund Holders: N/A
Roche Holding AG (OTC:RHHVF) is a Swiss firm that engages in the pharmaceuticals and diagnostics businesses in Europe, North America, Latin America, Asia, Africa, Australia, and Oceania. Earlier this year, the company announced that it had entered into a partnership with PathAI, a biotech firm focused on AI, to develop AI-enabled digital pathology algorithms in the companion diagnostics space. Under the terms of the deal, the algorithms developed under this agreement by the companies will be deployed using the Digital Pathology solution marketed by the Swiss drugmaker to clients across Europe.
Last year, Roche Holding AG (OTC:RHHVF) partnered with an Israeli firm called Medial EarlySign to help find patients for a new cancer drug that had shown improved results when tested against standard therapies. The drug, given after surgery to remove lung tumors, decreased the risk of either cancer recurrence or death by 76% compared with standard chemotherapy. AI would help the firm identify patients of this disease, only found in 5% of those with lung tumors, early on and treat accordingly.
9. The Sage Group plc (OTC:SGGEF)
Number of Hedge Fund Holders: N/A
The Sage Group plc (OTC:SGGEF) provides technology solutions and services for small and medium businesses in the United States, the United Kingdom, France, and internationally. The company is headquartered in the United Kingdom. Back in March, the company was placed among a basket of European equities by analysts at investment bank JP Morgan that would emerge as a winner from the AI craze sweeping the business world. The firm has an early mover advantage in the AI space, being one of the first tech firms in Europe to integrate AI into the cloud platforms it markets to small and medium businesses.
In the second quarter earnings call, Steve Hare, the CEO of The Sage Group plc (OTC:SGGEF), underlined that the firm had sustained strong revenue growth in the first half of 2024 underpinned by broad-based drivers across a portfolio of cloud solutions and markets. He attributed this performance to innovation, like the introduction of latest AI-powered solutions, as well as disciplined cost control that drove efficiency leading to good levels of margin expansion and a significant uplift in EPS and free cash flow.
8. Merck KGaA (OTC:MKGAF)
Number of Hedge Fund Holders: N/A
Merck KGaA (OTC:MKGAF) is a multinational science and technology company headquartered in Germany, with about 60,000 employees and a presence in 66 countries. The company has an underappreciated electronics business, with the chips division already contributing to almost 12% of the overall sales. As demand for AI chips rises, this figure is likely to grow. The management of the firm hopes to achieve an annual growth rate of 7% to 10% in the medium term. In forecast for the present fiscal year, the firm expects net sales to be in a range of €20.7 billion to €22.1 billion, contributing to organic growth of 2% to 5%.
Merck KGaA (OTC:MKGAF) has invited bullish forecasts from analysts on Wall Street, with Thibault Boutherin of Morgan Stanley noting that AI-related demand would accelerate growth for the electronics business of the firm in the coming months. The analyst has a price target of €200 on the shares, denoting an upside potential of 20%. Boutherin added that the firm could achieve growth targets driven by higher demand for complex material for AI semiconductor manufacturing.
7. SEGRO Plc (OTC:SEGXF)
Number of Hedge Fund Holders: N/A
SEGRO Plc (OTC:SEGXF) is a UK-based Real Estate Investment Trust (REIT). It is a leading owner, manager and developer of modern warehouses and industrial property. It owns or manages 10.4 million square meters of space valued at over £20 billion serving customers from a wide range of industry sectors. The most exciting developments related to the company in terms of AI are data center operations, the heart of the AI revolution. The real estate portfolio of the firm includes 34 data centers that contribute close to 10% to the total revenue. Morgan Stanley has described the firm as the landlord of the largest cluster of data centers in Europe.
Morgan Stanley analyst Bart Gysens is bullish on SEGRO Plc (OTC:SEGXF) and has a 1,050 pence price target on the stock, implying upside potential of around 19%. Gysens, in a recent investor note, detailed that the real estate firm had ambitious plans to grow in the data center space, with a pipeline including projects worth £200 million of future rent to be delivered over the next decade.
6. Orange S.A. (NYSE:ORAN)
Number of Hedge Fund Holders: 6
Orange S.A. (NYSE:ORAN) provides various fixed telephony and mobile telecommunications, data transmission, and other value-added services to customers, businesses, and other telecommunications operators. In addition to providing the high speed connections needed for AI services to work wirelessly, the company has also partnered with tech giant Google to deploy AI into the business, leveraging the power of generative AI for smarter networks, operational efficiency and improved customer service. This AI pivot has allowed the company to integrate AI into data centers that protect sensitive workloads on must stay on-premises, while also enabling the filtration of extremely high-volume data.
Orange S.A. (NYSE:ORAN) is ahead of the curve when it comes to modernizing telecom infrastructure, crucial for enabling a conducive growth environment for AI firms. The CapEx/Sales ratio of the firm is declining at a time when many major telecom firms on the continent still have high ratios of close to 20%. The African and Middle East operations of the firm also continue to be underestimated in terms of earnings potential.
5. STMicroelectronics N.V. (NYSE:STM)
Number of Hedge Fund Holders: 16
STMicroelectronics N.V. (NYSE:STM) is a Swiss firm that designs, develops, manufactures, and sells semiconductor products in Europe, the Middle East, Africa, the Americas, and the Asia Pacific. The company has long-term exposure to structural growth areas such as the energy transition, data centers, and microcontrollers. The company recently launched a smart sensor with edge AI processing for motion tracking in industrial and robotics applications. In June, the firm had launched the STAI suite, bringing together tools, software and knowledge to simplify and accelerate edge AI application development.
Morgan Stanley analyst Lee Simpson has an Equal Weight rating on STMicroelectronics N.V. (NYSE:STM) stock with a price target of €35. Simpson, although optimistic on the long term outlook, is skeptical about near-term catalysts for the stock. In a recent note, the analyst highlighted that the pressure on the shares, due to the long-running nature of this cyclical trough, would continue until 2025.
4. RELX PLC (NYSE:RELX)
Number of Hedge Fund Holders: 17
RELX PLC (NYSE:RELX).provides information-based analytics and decision tools for professional and business customers. It operates from the United Kingdom. The firm, valued at over $85 billion, employs more than 11,000 technologists and spends about £1.3 billion a year on information technology services. In late July, the company reported half-year results, posting a revenue of over £4.6 billion with profit climbing to £1.5 billion. The results were accredited to the demand for analytics underpinned by AI. The company, confident in AI and overall demand, also said it had completed £700 million of a previously announced £1 billion share buyback.
Erik Engstrom, the CEO of RELX PLC (NYSE:RELX), said during the earnings call that his firm had delivered strong revenue and profit growth in the first half of 2024 on the back of an improving long-term growth trajectory. He noted that the growth was driven by the ongoing shift in business mix towards higher growth analytics and decision tools powered by AI.
3. SAP SE (NYSE:SAP)
Number of Hedge Fund Holders: 24
SAP SE (NYSE:SAP) is a German firm that provides applications, technology, and services worldwide. The company has pledged to launch nearly 100 AI-focused products this year. This is part of a larger plan by the software and analytics firm to integrate AI into a suite of cloud offerings for business clients. As part of this plan, the firm released Joule, a virtual AI assistant, last year. The assistant was designed to help the customers of the firm intelligently sift through their enterprise resource planning (ERP) data. The company is planning to shift focus towards US markets and this could drive further investor interest towards the stock.
Morgan Stanley analyst Adam Wood recently noted that SAP SE (NYSE:SAP) is well positioned to capitalize on the emerging generative AI market opportunity. Wood believes this is because of the large quantity of business data that the firm has and the AI functionality it powers that data with, which is embedded into core products already. Morgan Stanley has a target price of €224 on the stock, signifying upside potential of over 18%.
2. Rio Tinto Group (NYSE:RIO)
Number of Hedge Fund Holders: 37
Rio Tinto Group (NYSE:RIO) engages in exploring, mining, and processing mineral resources worldwide. It is headquartered in the United Kingdom. Investors who have studied AI in great detail understand that there are some long-term AI plays in Europe other than software and chip firms. One of these long-term bets is linked to the rise in demand for copper as large firms commit billions towards the development of AI data centers. Copper, one of the premier mining operations of Rio Tinto, is one such commodity. It is used extensively in AI data centers. Even though leading AI chips are made of silicon, copper has a key role, interconnecting the integrated circuitry within these chips.
AI-linked demand has led to a shortage in copper supplies, sending prices above $11,000 a metric ton back in May this year. Rio Tinto Group (NYSE:RIO) is one of the biggest beneficiaries from this AI boom. Half-year earnings released by the firm in July reveal that higher copper production and prices have helped to offset a slightly lower production and prices from the dominant iron ore business.
1. ASML Holding N.V. (NASDAQ:ASML)
Number of Hedge Fund Holders: 75
ASML Holding N.V. (NASDAQ:ASML) is a Netherlands-based firm that makes and sells advanced semiconductor equipment systems. The business derives a competitive edge in the AI space through the marketing of extreme ultraviolet (EUV) lithography tools. These tools are used by key AI firms like NVIDIA and Taiwan Semiconductor Manufacturing Company to print design features at a very small scale on the leading edge chips. The chips of NVIDIA and TSM are then used in consumer electronics and data centers around the world who offer AI services. Orders of EUV for the manufacture of the N2 tech node, expected to be used in new iPhones, have surged in the past few months. Latest updates from the firm reveal that bookings for EUV accounted for €2.5 billion out of total net bookings of €5.6 billion in the second quarter.
Investment advisory Morgan Stanley has a bullish view of ASML Holding N.V. (NASDAQ: ASML) stock. The advisory recently named the firm among a basket of equities that comprise the European AI shopping list. Morgan Stanley has a $1,092 price target on the stock, implying upside potential of an impressive 27%. Analyst Lee Simpson has highlighted that ASML has a monopoly in leading edge lithography equipment.
While we acknowledge the potential of ASML Holding N.V. (NASDAQ: ASML) as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than ASML but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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