Tech stocks falter: The reality check Europe needs?

James Gard: Welcome to Morningstar. I am delighted to be joined again by Michael Field.

So, Michael, we’ve had a tech selloff and now we’ve had a tech comeback. So where does that leave European tech investors?

Michael Field: So I think tech investors are worried. Of course, when a sector has risen as much as it has so far this year and carried the overall index to some degree, there’s always a little fear when stocks sell off in Europe. But from a valuation standpoint, fortunately, if you look through stocks, it’s not a slam dunk that they have to go down or that valuations have to adjust eventually.

Fence: So you picked three stocks as sort of hallmarks of the European tech sector. These are ASML, SAP and ARM, which is technically a British company but listed in the US. So two of those have had very strong gains so far this year, including even sales. So SAP is up 40%, ARM is up 85%. So the sales didn’t really register.

Domain: To some extent. Look, obviously, if you’ve been invested in the last few months, you’re not going to be very happy. But ultimately, if you’ve been a longer-term holder of the story, it seems like a problem. Look, expectations always have to adjust to the realities of the situation. But if you look at the growth of these companies and the kind of medium-term structural story that they’re talking about, SAP with cloud computing, like ARM and ASML with the AI ​​aspect, there’s a lot to be optimistic about even in terms of as a shareholder of these companies at present.

Fence: Sure. So, starting with ASML, it shows we’ve only grown 5% to date, so we’re not lights out. But according to Morningstar statistics, the stock is still undervalued, but that’s – ASML is seen as the kind of epicenter of European technology. It’s kind of an echo of NVIDIA. It’s still not NVIDIA’s success story, but it’s very much seen as a point of view.

field: Indeed. So I guess, look, there’s always a danger with promoting the AI ​​aspect of ASML, which is definitely not a pure AI game. Finally, they make the semiconductor machines that make semiconductors. So it’s very much a second derivative in that respect. But there are advantages to this. They are not exclusively exposed to one sector or industry. They’re pretty diverse overall. And again, we’ve been talking about medium-term structural growth stories, and this certainly fits the bill.

Fence: Sure. So moving to SAP, it is a narrow ditch stock. It projects as overvalued in terms of values, but it is quite a strong company in the German scene.

field: Of course. I think it’s one of the kind of tech companies that the Germans and us Europeans point to in terms of comparisons to the US and whether we have any sort of national champions in that. But look, yes, the ratings show it’s overrated. But I think, look, if you look at the underlying growth of the company, it’s very strong from that perspective. I think what we’re indicating is just that there’s a bit of a difference of opinion between what the market expects now and what the company is capable of producing.

Fence: Sure. And so moving on to ARM Holdings, I know it’s listed on the NASDAQ. It is a wide ditch stock. It is currently designed as a star. So it’s up 85% this year and the stock has doubled since its wildly popular launch. Where does that leave investors, really? Because he’s clearly a beneficiary of all the technology – I don’t mean work – but definitely enthusiasm for all things tech?

field: Indeed. And as much as I’ve highlighted the tech sector and European stocks in general and said there’s still value there, ARM Holdings is one of those more glaring examples where expectations just got way ahead of them. And we’ve talked about that before in terms of expectations, and we have pretty high expectations for this stock in terms of pretty strong margin expansion and revenue growth continuing for quite a long time. And we still end up at a valuation nearly half where the stock is trading today. So that will show you how high the expectations are for this company right now.

Fence: Sure. So thinking about it, I mean, when there’s a sell-off, if there’s another sell-off, companies that are rated as overvalued by Morningstar, you’d say they’re more vulnerable to a correction and have more risk for investors at this stage?

field: So I think there are two aspects to this. Feeling being what it is, sometimes it is a blunt instrument that removes everything and anything that is seen or based on some kind of current expectation. But I think, look, if we want to be critical in that, and that’s the kind of house that we are, and if you want to know exactly where it’s most vulnerable from that perspective, yes, indeed, we can pull up. the most valued stocks or stocks that we think are overvalued in Europe right now and should generally stay away from. But certainly, if there really could be another selloff, they’re certainly not places you want to be invested in, because even if things turn around, we think these stocks, their valuations are too high to begin with.

Fence: Correct. So there’s a cherished vulnerability in that. I mean, things have calmed down since NVIDIA had an overnight rally. But there are still risks in the system. As for what might save the AI ​​narrative, interest rate cuts seem like the obvious way to keep the market going. What else could you say? A bit of economic growth in Europe? I know things are pretty hot right now. But what could get the ball rolling?

field: I think the macroeconomic factors that you talked about, the interest rate cuts, etc., obviously have a quantitative effect on the valuations of these companies and will improve the situation in the short term. But specifically talking about AI, what we need now is the use of AI and the integration of AI into everyday life and everyday companies to grow or show itself in the next few years. And this kind of confirms the positive story that people are turning on AI.

Fence: Sure. I mean, we had the hype. Market valuations have risen. But we need to see some kind of daily practical use of it. And there is evidence that has begun to happen. The new Apple iPhone is very powerful with AI, generative AI. So it’s definitely – you can see it. There are things moving in that area.

field: I think it’s fair to say, yes. But I think it’s just the next step and the next – companies have been talking about this for a while. But it’s just to see those physical next steps put into place and that will ultimately strengthen the story if it actually comes to fruition.

Fence: Sure. Great. So, well, next time we meet, we’re going to talk, I think, about the US election. And that is indeed a potential threat to the US stock market as it stands right now. But should we park it there and work it out next time?

field: Absolutely. Look forward to it.

Fence: Brilliant. Thank you for your time and your thoughts, Michael.