The technology rally appears to be broadening, with investors looking beyond U.S. megacap stocks as worries about higher interest rates ease. One way to diversify and search for companies with room to rise is to look at the European tech sector.
There are reasons to look for Europe as a potential market for diversification options.
Goldman Sachs
said last month that its asset strategists still see a more favorable outlook for European equity markets relative to the U.S., pointing to factors such as an overvalued dollar, an improving regulatory backdrop in Europe, and a valuation gap larger than at any time in the last decade.
Meanwhile, tech is as much a favorite across the Atlantic as in the U.S. The
Stoxx Europe 600 Technology Index
is up 21% this year so far, against an 8% gain for the broader
Stoxx Europe 600 Index
and a 40% gain for the
Nasdaq 100.
Barron’s screened the European technology sector for companies with an annualized sales growth rate of at least 10% over the last five years and operating margins of at least 10%, to show they can turn their growth into profit.
Looking for stocks that offer some value along with their growth, the filter also included the ‘PEG’ ratio -the ratio of the price/earnings multiple to expected earnings growth.
While a PEG ratio of 1.0 times or lower is generally considered the mark for finding value, tech investors are currently paying up for growth. The Nasdaq 100’s average PEG ratio stood at 2.8 as of Monday, as calculated by Barron’s. Looking for some value similar to that, the European list has been filtered for stocks with a PEG ratio of less than 2.0.
As with any screen, it should only serve as a starting point for further analysis. Here’s the list:
| Company / Ticker | Recent Price ($ equivalent) | Market Value (mil) | Sales (mil) | Price/Earnings-to-Growth (PEG) | Operating Margin | Annualized 5-year Sales Growth | YTD Return |
|---|---|---|---|---|---|---|---|
| Netcompany Group / NETC.Denmark | $47.3 | $2,366.6 | $798.6 | 2.0 | 15.0% | 26.8% | 4.8% |
| TeamViewer / TMV.Germany | 16.9 | 3,045.9 | 606.0 | 1.7 | 21.5 | 12.4 | 38.0 |
| ASML Holding / ASML | 717.5 | 289,261.8 | 27,035.3 | 1.7 | 30.7 | 22.2 | 25.0 |
| BE Semiconductor Industries / BESI.Netherlands | 118.3 | 9,601.6 | 629.9 | 1.6 | 40.7 | 13.9 | 89.0 |
| AIXTRON / AIXA.Germany | 38.5 | 4,364.5 | 546.6 | 1.6 | 21.0 | 19.0 | 32.0 |
| Infineon Technologies / IFX.Germany | 42.8 | 5,5851.5 | 16,464.7 | 1.5 | 21.6 | 18.7 | 19.0 |
| Capgemini / CAP.France | 197.4 | 3,4266.4 | 23,116.2 | 1.2 | 12.4 | 13.7 | 3.9 |
| Reply / REY.Italy | 112.0 | 4,190.2 | 1,987.5 | 1.2 | 13.9 | 15.8 | -11.0 |
| Soitec / SOI.France | 197.1 | 7,015.8 | 1,132.2 | 1.2 | 23.0 | 21.9 | 16.0 |
| Elmos Semiconductor / ELG.Germany | 87.8 | 1,554.5 | 535.3 | 1.2 | 24.9 | 14.5 | 46.0 |
| PVA TePla / TPE.Germany | 23.2 | 503.9 | 239.7 | 0.9 | 12.1 | 18.0 | 6.5 |
| SUESS MicroTec / SMHN.Germany | 23.9 | 457.0 | 318.4 | 0.9 | 10.6 | 12.3 | 43.0 |
Data as of July 28
Source: FactSet
The list is dominated by stocks in the semiconductor sector. While earnings and valuations have been dented by a supply glut of chips in certain areas, the growth of artificial intelligence and a reduction in semiconductor inventories suggest better things ahead and a possible rerating for the sector overall.
One name which might already be familiar with U.S. investors is
ASML Holding
(ticker: ASML). Tradable by its American depositary receipt, the Dutch company supplies the ‘lithography’ machines that are essential for manufacturing semiconductors. While increasing controls on its exports to China are a potential drag on growth, it has a dominant market position, which led
J.P. Morgan
analysts label it the “only hiding place” in the semiconductor sector in cyclical slowdowns.
The other major semiconductor heavyweight in the list is
Infineon Technologies
(IFX.Germany). The German company specializes in automotive chips and has already raised its full-year guidance twice this year on strong demand from car markets and the industrial sector. Its specialized markets mean it is relatively shielded from the slowdown in electronics spending which has hit other companies in the industry.
Smaller semiconductor stocks in the list include another ‘picks and shovels’ play –a company providing the tools for the industry– in Germany’s
Aixtron
(AIXA.Germany). It recently raised its outlook for this year in light of strong demand for its deposition equipment, particularly around chips designed for efficient power management, an area expected to boom with the growth of electric vehicles.
Beyond semiconductors,
Capgemini
(CAP.France) stands out as one of Europe’s tech heavyweights. The French technology and consulting firm was a Covid-19 pandemic beneficiary as more companies used its services to help move to cloud computing. Since then its stock price has stagnated as technology spending has slowed but AI could provide another boost. Capgemini said in its recent earnings that it plans to invest $2.2 billion in AI over the next three years.
German company
TeamViewer
was also a stock market darling during the pandemic when its remote-connectivity software rocketed in use as people worked from home. Its shares have plunged since then but it has rallied strongly this year as its growth outlook has beaten consensus expectations and it is pointing to the use of augmented-reality applications in businesses as a source of growth.
European tech is only one source of possible diversification but the growth of AI and other technologies could mean winners beyond the largest U.S. companies. That means companies beyond American shores are worth a look.
Write to Adam Clark at [email protected]
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