With eurozone economic growth outpacing that of the U.S., a number of European technology stocks appear well positioned to outperform their American peers, especially as the bullishness characterizing the FAANG stocks over the past year is starting to make that trade look overcrowded.
For investors looking for exposure to the tech sector but weary that all of the smart money and some have already piled into the FAANGs—Facebook, Apple, Amazon, Netflix and Google’s parent company Alphabet—ASML Holding (ASML), a Dutch chip-making equipment provider, and SAP (SAP), the German software giant, both look promising, according to Barron’s. (To read more, see: FANG Stocks’ Downside Risk Jumps as Tech Bets Rise.)
Benjamin Segal, portfolio manager for the Neuberger Berman International Equity fund, in discussing European tech companies on par with America’s FAANGs, told Barron’s that both ASML and SAP are “are pacesetters with room to run.”
Two European chipmakers, Austria’s AMS and Switzerland’s STMicroelectronics (STM), are also well positioned as the rising trend of the Internet of Things will support the demand for microchips for the foreseeable future.
ASML’s New Chip-Making Technology
While there are some other big European tech names like Finland’s Nokia and Sweden’s LM Ericsson, Segal argues that both these companies are large suppliers to the telecom industry and that industry has not been inclined to spend big recently. These companies also face more intense competition from Chinese rivals, which have strong backing from the Chinese government and face lower costs of capital.
One of the factors making ASML stand out is its innovative extreme ultraviolet (EUV) technology that could allow the company to offer chip-making equipment that produces microchips that are both faster and cheaper than the technology currently in use. Of course, the Dutch chip producer is also riding the whole Internet of Things trend mentioned earlier.
ASML shares have already seen a year to date gain of 40% and are trading around 26 times the company’s forecasted forward-year earnings. Yet despite the seemingly high price, Segal argues that the company has yet to ramp-up deliver for its EUV systems. When that happens, earnings will start catching up with the price.
SAP’s Expanding Market Share
The appeal of SAP, according to Segal, is the range of its enterprise resource planning (ERP) software and the fact that it has joined the cloud, making it easier for smaller companies to use its products. These factors are helping SAP to expand its market share in a market that is itself, growing. (To read more, see: Enterprise Resource Planning.)
While SAP shares are trading at 20 times forecasted forward-year earnings, above rival Oracle’s price to earnings (P/E) ratio, Segal argues that it is a “more than reasonable” valuation considering the business is one that is “growing organically and sustainably at close to 10% in a low-growth world.” The company’s profit margins are still expected to pick up. If that does not happen then one should start to worry.