European AI Adapter Stocks that have hit wave sales
New AI models pose threats to software companies and consultants
High ratings, selling worsened by investors' bargains
LONDON, August 15 (Reuters) – The stock defeat of European companies employing artificial intelligence deepened this week as a powerful new AI model raises questions about whether technology has overtaken the sector from software to data analytics.
European software stocks, including German SAP and French Dassault System, fell on Tuesday as AI worried that it would hinder the software sector from spreading into the market. It followed a downgrade of US rival Adobe on Monday by broker Merius Research.
Since mid-July, shares in Market and Data Group LSEG, UK software company Sage, and French IT consulting group Capgemini have fallen 14.4%, 10.8% and 12.3%, respectively.
These companies are called AI adopters by analysts and invest heavily in technology to enhance their products and services. Their stocks benefited as local investors sought a way to tap on the AI boom powered by the US market amid a shortage of European AI companies and suppliers.
However, the release of more powerful AI tools than ever before seems to have prompted a rethink among some market players.
Last week, Openai launched its GPT-5 model. This is the latest iteration of AI technology that has helped transform global business and culture since the arrival of ChatGPT in late 2022.
Kunal Kothari, fund manager at Aviva Investors, also pointed out the release of Anthropic's Claude for Financial Services on July 15th.
“The apps that came out challenged investment cases around the London Stock Exchange (LSEG) regarding the provision of financial data,” he said.
“We're on the stage now with every iteration of GPT or Claude that's coming out…it's a higher magnification than the previous generation. Market thoughts: “Oh, wait, challenge this business model.”
The decline in adoption inventory in Europe is in contrast to the profits of the broader market. Since mid-July, London's FTSE 100 has grown by 2.5% and Europe's Stoxx 600 has grown by 0.6%, while the US index has grown to record highs, mainly with high-tech stocks.
According to Bernie Ahkong, chief investment officer of hedge fund UBS O'Connor, the worsening problem is the fact that many European adoption stocks trade at high multiples and become vulnerable to potential negative news.
The STOXX 600 trades 17 times at multiples of revenue from the average price, while SAP trades at around 45 times, a 7.2% decline since mid-July after its biggest daily decline on Tuesday in late 2020.
Many AI adoption stocks struggle, but some investors say the market will ultimately take a more systematic approach and pick out potential winners and losers.
“At this point, it feels like the market is first filming and putting everything in a 'challenged basket',” said Kothari of Aviva, referring to the decline in adoption of UK AI.
The hype about the new AI model led to the resurrection of a 2017 comment from Jensen Huang, CEO of AI Chip Making Behemoth Nvidia.
“We've been working hard to get the most out of our business,” said Steve Wreford, portfolio manager for the Global Theme Equity Team at Lazard Asset Management.
He said people with software deeply embedded in client companies' workflows, or unique data that is difficult to replicate, still have strong competitive advantages.
Paddy Flood, portfolio manager at Schroders and global sector expert, said it's important to distinguish between different types of software.
“Enterprise-grade applications are less exposed given their mission-critical nature, the complexity involved in exchanging them, and the value of reliable vendors to ensure ongoing service,” he said.
Kothari from Aviva also flagged the benefits of having deep embedded software in its customers, citing the UK credit data company Experian as an example.
“It has a lot of data that is unique to it, but it is also very embedded in the workflow of financial institutions. They want to make loans.
He holds both stocks along with LSEG, but warned that even their own data alone may not be enough to protect the company anymore.
“I don't think the data is a moat that's big enough,” he said.
According to Ahkong of UBS O'Connor, the sale of AI Adopter Stocks could be an opportunity for investors to choose the winner.
“Some of the affected names can actually use AI as an opportunity and tails off for revenue, but we need to prove that from here.
However, it is unclear how much time the company has. Some investors had already warned that the clock was ticking earlier this year, large AI spenders were exploring their watches to show returns.
(Reporting by Lucy Ratano; Edited by Amanda Cooper and Mark Potter)
