The numbers don’t lie. European stocks have underperformed their US counterparts since 2009. This can in large part be blamed on the influence that the technology giants – at times the ‘magnificent seven’, at others the ‘FAANGs’ – have had on our lives. In an online age, being a dominant provider of search, cloud storage or social interactions has been seen as a licence to print money.
It is widely accepted that the next era of our lives will be shaped in some way by AI. This acceptance is reflected by the giants of Silicon Valley. Amazon, Microsoft, Google and Meta are all spending big on AI.
The European winners of the AI boom
Less understood is that a significant proportion of that money is flowing into Europe. Here, it isn’t an Open AI-style innovator that is receiving investment. Rather it is what we call the ‘picks and shovels’ of the AI transition. Developing and being ready for whatever real AI solutions emerge requires a lot of resource. From data centres to microchips, none of the big tech players can afford to be left behind.
Helpfully, Europe is well-represented in this arena. A standout example is ASML, a Dutch business that is currently one of the largest suppliers to the semiconductor industry. It is the sole supplier of a type of lithography machine (EUV) that is required to manufacture advanced chips.[1] The company is our second-largest holding at the time of writing.
But there are low-tech beneficiaries of AI spending too. Half of big tech’s spending in recent years has gone on assets like land and buildings. CRH is a Dublin-headquartered building materials supplier. What that means in the real world is that it pours a lot of concrete, particularly in the US. And in the last few years it has carved out a niche as a chosen supplier for data centre construction. Its share price rose 57% in the year to 8 October 2024.
The ‘picks and shovels’ theme is a core part of the Henderson European Trust portfolio.
Can the good times continue?
The brief sell-off in US markets over the summer prompted some to speculate that AI spending could start to taper off. The argument goes that as the real-world applications of AI prove elusive, so do revenues. Why would the big tech giants reduce their profit margins for a theoretic outcome?
We think there are several reasons why this assumption is wrong.
First, to put it plainly, when it comes to AI the tech giants must ‘do or die’. If and when AI becomes an integral part of cloud services, the only cloud services provider without AI capabilities is unlikely to have a happy time of it.
Second, following years of corporate dominance, big tech can more than afford this spending. They have more assets, that are more liquid, and are more credit-worthy than many governments.
Third, no one – with influence – is apparently asking them to stop. Most importantly, shareholders appear to be on board with these companies’ spending plans.
With this in mind, we expect the ‘picks and shovels’ theme to persist.
[1] What is EUV lithography? – IBM Research
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Glossary
FAANG – FAANG is an acronym referring to the stocks of the five most popular and best-performing American technology companies. These are Meta (formerly known as Facebook); Amazon; Apple; Netflix; and Alphabet (formerly known as Google).
Liquidity/Liquid assets – Liquidity is a measure of how easily an asset can be bought or sold in the market. Assets that can be easily traded in the market in high volumes (without causing a major price move) are referred to as ‘liquid’.
The Magnificent Seven – The Magnificent Seven stocks are a group of high-performing and influential companies in the U.S. stock market: Alphabet, Amazon, Apple, Meta Platforms, Microsoft, NVIDIA, and Tesla.
Profit margin – The amount by which the sales of a product or service exceeds business and production costs.
Share price – The price to purchase (or sell) one share in a company, not including fees or taxes.
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