European companies investing heavily in generative artificial intelligence must demonstrate returns on their substantial expenditures by next year or risk losing investor patience after paying steep prices to enter the market.
AI-related stocks have struggled alongside broader equity markets in recent weeks amid rising recession fears, adding to the pressure that began with the roll-out of the low-cost Chinese AI model DeepSeek in January.
While many investors remain optimistic about Gen-AI's potential to enhance productivity and profits, others are becoming more selective. A trend is emerging that favors shares of companies utilizing AI technology—such as information group RELX and software firm SAP—over those supplying chips and hardware to the industry.
However, these adopters also need to start showing returns on their investments in the technology, or investors may turn their attention elsewhere.
Chipmaker Nvidia, a pivotal player in the AI boom, saw its shares impacted by the introduction of DeepSeek's AI model, which depends less on its more expensive chips. Nevertheless, Nvidia's stock is up 29% year on year.
In Europe, opportunities in AI-exposed stocks are limited compared to Wall Street, but trends are evident. Among hardware manufacturers, chip equipment makers ASM International and BE Semiconductor have fallen 25% and 20%, respectively, since the January 24 selloff linked to DeepSeek and amid fears of a U.S. recession. France's Schneider Electric, which supplies electrical equipment to data centers, is down 14%.
Among AI adopters, data group LSEG has dropped 5.5%, while RELX is only 1.6% lower. German software group SAP has decreased by 2.9% and recently surpassed Novo Nordisk in market value.
“Everyone was very narrowly invested in the AI enablers,” noted Gerry Fowler, head of European equity strategy at UBS.
With DeepSeek's affordability, the markets are increasingly focused on the direct beneficiaries of AI advancements.
An internal survey conducted by Fidelity in January revealed that nearly 72% of the analysts surveyed did not expect AI to impact the profitability of the companies they cover by 2025. While a higher number anticipated positive effects over a five-year horizon, several European portfolio managers expressed a shorter timeframe.
“The market will lose patience with unlimited investment in AI unless it starts seeing some return on investment,” stated Steve Wreford, lead portfolio manager on the global thematic equity team at Lazard Asset Management. Wreford suggested that while companies adopting AI might be given leeway in 2025, they must start demonstrating significant impacts on revenue by 2026.
Valuations for AI-exposed stocks are notably high. The STOXX 600 trades at an average price-to-earnings multiple of 17, while AI adopters like SAP and LSEG trade at approximately 90 times earnings, according to LSEG data.
Bernie Ahkong, chief investment officer at hedge fund UBS O'Connor, remarked that investors would start questioning the valuation multiples of certain companies if they do not deliver results by the end of 2025. He cautioned that as time progresses, management could find excuses for delays, but by the fourth quarter, impatience is likely to set in.
Paddy Flood, portfolio manager and global sector specialist in technology at Schroders, pointed out that the biggest risk in AI investments lies in the emergence of viable use cases that people are willing to pay for. “To justify continued spending, we need to see concrete applications, either a standout 'killer' use case or a spectrum of impactful ones.”
Fabio di Giansante, head of large European equities at Amundi, Europe’s largest asset manager, acknowledged that the limited number of European AI plays commands a premium. However, he emphasized that news from the sector must eventually translate into benefits for revenue and margins. “At some point, the impact of these developments on the top line must become evident, or valuations may be reevaluated. This year could see that happen on a larger scale.”