Looking beyond Europe’s chipmakers

RATHER than chasing Europe’s increasingly expensive artificial intelligence (AI) chipmakers, investors are widening their search for companies that could profit from the AI boom in less obvious ways, according to a Bloomberg report.

With Europe home to only a handful of major AI and semiconductor stocks compared with the United States and Asia, fund managers are increasingly turning their attention to businesses supplying the infrastructure behind AI, as well as companies expected to use the technology to improve productivity and cut costs, the newswire pointed out.

The shift comes as valuations of Europe’s traditional AI favourites continue to climb, making investors question how much upside remains. At the same time, recent volatility in US technology stocks has highlighted the risks of paying ever-higher prices for companies already seen as AI winners.

Instead of buying chipmakers outright, investors are increasingly backing the companies that enable AI’s rapid expansion. These include industrial firms supplying electricity networks, cables and automation equipment to the data centres powering AI models, as well as sectors expected to benefit from AI-driven efficiency gains.

Stephane Deo, senior portfolio manager at Eleva Capital, tells Bloomberg that the investment opportunity in Europe lies in what he described as the “classic pick and shovel trade”.

“I’m taking the view that hyperscalers’ capital expenditure is someone else’s sales,” he said, referring to the billions of euros that technology giants are pouring into AI infrastructure.

Europe’s relatively small technology sector explains why investors are casting the net wider. Technology accounts for just 9% of the Stoxx 600 index, compared with 44% of the S&P 500. Semiconductor stocks make up only 6% of the European benchmark, versus 19% in the US index, leaving investors with far fewer direct AI plays.

As a result, electrification and power infrastructure have become some of the market’s most popular themes.

Money flows

The European Union has committed more than €800bil in grants to support decarbonisation and electricity infrastructure, while Germany has unveiled its own €500bil fiscal package. Investors expect much of this spending to complement the huge investments being made by cloud computing companies building AI-ready data centres.

Companies positioned to benefit have already enjoyed strong gains. France’s Schneider Electric has climbed 28% over the past year, while Italy’s Prysmian has surged around 150%. Siemens Energy has also rallied roughly 66% as demand for power equipment continues to strengthen.

Swiss engineering company ABB has become another favourite among investors. Its power distribution systems are already used in Microsoft’s data centres, while it is also working alongside Nvidia on next-generation 800V direct current architecture designed for future gigawatt-scale AI facilities.

“Nvidia gets the headlines, ABB gets the purchase orders,” Calibrate Management founder Michela Ferrulli said at the Sohn Monaco conference, according to Bloomberg.

One attraction is valuation. Bloomberg notes that the forward price-to-earnings ratio for the MSCI Europe Semiconductor Index recently climbed to 45 times earnings, its highest level since the global financial crisis.

By comparison, industrial companies with AI exposure trade at around 30 times forward earnings, while businesses expected to adopt AI internally still trade at less than 15 times, slightly below the broader market.

That valuation gap is encouraging investors to look beyond hardware and towards companies likely to see meaningful productivity gains from AI.

Lending strength

Banks have emerged as one of the sectors attracting growing interest. Morgan Stanley estimates AI could lift productivity across banks by as much as 50% over the next five to 10 years.

Banco Santander has set a target of generating more than €1bil in business value from AI between 2026 and 2028 through additional revenue and lower operating costs. HSBC also expects to roll out more than 200 new AI use cases over the next two years.

According to Gilles Guibout, head of equities at BNP Paribas Asset Management, lenders increasingly appear to be among the biggest beneficiaries of AI through cost reductions.

There are still investors willing to own Europe’s more direct AI plays, although many are becoming increasingly selective.

French semiconductor materials company Soitec has delivered triple-digit gains this year as investors bet on rising demand for advanced computing capacity. However, Bloomberg notes that photonics remains a relatively small and volatile corner of the market, with limited liquidity.

Meanwhile, established semiconductor names, such as ASML Holding and BE Semiconductor Industries, continue to be viewed as essential holdings for many AI-focused portfolios. Yet, their popularity has also pushed valuations sharply higher.

Jean-Marc Delfieux, head of equities at Tikehau Capital, tells Bloomberg that both companies remain important long-term AI investments, but the trade has become increasingly crowded.

“They’ve become expensive, actually very expensive, so we have started to trim our positions,” he said.

The strategy of looking beyond Europe’s traditional AI winners appears to be gaining traction.

During a recent bout of market volatility, investors sold many of the largest global AI stocks amid concerns over stretched valuations and crowded positioning. In contrast, a basket of European AI adopters compiled by UBS rose nearly 2%, Bloomberg reports.

Some strategists believe this broader approach could mark the next phase of Europe’s AI investment story.

Citigroup strategists led by Beata Manthey see industrials, healthcare, information technology, telecommunications and financial services as sectors with significant scope to benefit from AI-driven productivity improvements.