European investors warn that the clock is ticking on AI adoption

European companies who are investing heavily in generative artificial intelligence must start showing results by the end of next year or investors will lose patience.

AI-exposed shares have been downdrafted with the broader equity market in recent weeks, as fears of recession rise. This has added to the pressure on the sector, which was already under strain in January when the launch low-cost Chinese AI DeepSeek sparked a tech sale.

Many investors are optimistic about Gen-AI and its potential to boost profits and productivity. However, others are more selective, preferring to invest in companies that adopt AI technology, such as information group RELX or software firm SAP, over those who supply chips and other hardware.

They also warn that adopters must start showing return on their investment in the technology, otherwise investors may lose interest.

PENDULUM SHIFT TO ADOPTERS

Nvidia is now almost synonymous with AI. The company's stock has risen 29% in the past year, despite its shares being hit by the DeepSeek AI model that requires less of its more expensive chips.

There are fewer AI stocks available in Europe than on Wall Street. However, the trend is still clear.

ASM International, a chip equipment maker, and BE Semiconductor have fallen by 25% and 20% respectively since January 24, when DeepSeek sparked a sell-off. This is also the time of recession fears in the United States. Schneider Electric in France, which supplies electrical equipment to data centers, has fallen 14%.

Among AI users, LSEG has fallen 5.5% while RELX has only dropped 1.6%. SAP, the German software company for business, is down 2.9%. It surpassed Novo Nordisk on Monday to become Europe's largest company.

Gerry Fowler is the head of European equity at UBS.

DeepSeek is a cheapening of AI, and the markets are looking to see who the real beneficiaries are.

PATIENCE HAS LIMITATION

A survey of more than 100 Fidelity analysts conducted in January revealed that 72% believed AI would have no impact on profitability in the companies they cover by 2025.

Fidelity analysts saw positive impacts over a longer period of time than the average. Several European portfolio managers said their timeframe was shorter.

The market will lose patience if it does not see a return on its investment, said Steve Wreford. He is the lead portfolio manager of Lazard Asset Management's global thematic equity group.

Wreford said that companies adopting AI will be given a break if they do not deliver much by 2025. This is when they will likely roll out beta-testing and trials. But, by 2026, they need to see a significant impact on their bottom lines.

The valuations of AI-exposed companies are expensive. According to LSEG, the STOXX 600 has an average multiple of 17 for price-to earnings, while AI adopters such as SAP and LSEG have multiples around 90 or more.

Bernie Ahkong is the chief investment officer of UBS O'Connor hedge fund. He said that investors will begin to question some companies' multiples by 2025 if they do not deliver.

Management teams can use this excuse to justify a multi-year project. He said that if it doesn't arrive by Q4 then people will lose patience.

KILLER CASE

Paddy Flood is a portfolio manager at Schroders and a global sector specialist in technology. He believes that the biggest risk to investing in AI in general is whether people will actually pay for viable AI use cases.

"To justify continuing spending, we must see concrete applications. Whether a single killer' application or a variety of impactful ones."

Fabio di Gianante, the head of large European equity at Amundi - Europe's largest asset manager - said that the relative scarcity in European AI meant that they were already priced at a premium. However, the majority of news coming out of the sector so far has been about capital spending and orders.

He said that at some point, you will need to see how these things affect the top line and the margins. If the benefits are not as large as implied by the valuations, the multiples may be reassessed.

This could be the year that this occurs on a large scale.

(source: Reuters)