The Big AI Trade in Europe Is All About Data Centers and Power

As the global excitement surrounding artificial intelligence propels stock markets to new heights, European industries crucial for supporting this technology are seeing significant gains. A collection of ten European companies, primarily data center operators and infrastructure providers, has surged by 23% this year, outperforming the Stoxx Europe 600 Index's 12% increase and even eclipsing the Nasdaq 100's performance. This trend highlights a growing investor interest in the European sector, which is set to benefit from the influx of hundreds of billions in global AI investments. Helen Jewell, chief investment officer of EMEA fundamental equities at BlackRock, noted that while infrastructure may not be as glamorous as the big tech names in the US, it represents the foundational story of AI in Europe. "We are at the beginning stages of this trend. Key elements such as power infrastructure, grid stability, and energy efficiency are essential to the AI narrative in Europe, particularly beyond software development," she stated. This week, renewed enthusiasm for AI emerged following a series of global partnerships, including one with Nvidia Corp., which rallied stock markets and sent the MSCI All-Country World Index to an all-time high. However, European tech stocks have not benefitted as much due to limited exposure to Nvidia’s supply chain, with the Stoxx 600 Technology Index only rising about 6.7% this year. In contrast, companies viewed as proxies for AI, such as Siemens Energy AG, have experienced remarkable growth, with shares soaring 111% this year. Investors are also eyeing potential in telecom firms like Orange SA and grid operator National Grid Plc, as power generators are positioned to thrive given the energy demands of AI models. Siemens Energy stands out as a top choice for Ninety One, an investment firm managing $192 billion in assets. Fund manager Ben Lambert emphasized the importance of Siemens in connecting power from the grid to data centers, especially following President Donald Trump’s announcement of a joint venture involving SoftBank, OpenAI, and Oracle to fund significant AI infrastructure projects. Despite these gains, Siemens Energy's stock remains 60% cheaper based on its price-to-earnings ratio compared to its US rival GE Vernova Inc., with both companies accounting for over 70% of the gas turbine sector’s production capacity. In the realm of energy transmission, Italian manufacturer Prysmian SpA has also captivated investors with its earnings potential, boasting a 41% stock increase this year and trading at a forward earnings ratio lower than that of leading chip-equipment maker ASML Holding NV. JPMorgan Asset Management's Alexandra Sentuc highlighted the growth of European industrial firms benefiting from the increased demand for data centers driven by AI. Legrand SA, which provides essential equipment for data centers, saw its stock rise by 52% this year after generating 20% of its revenue from this sector. Telecom companies running data centers that can be adapted for AI applications, like France’s Orange, are also in a prime position for growth. Additionally, Finland’s Nokia Oyj, which manufactures network switches for data centers, could see its revenue estimates rise by €300 million ($352 million) by 2026 due to increasing hyperscaler sales. Despite the overall optimism in these sectors, challenges such as limited liquidity and stringent AI regulations pose risks. Nevertheless, with investments already flowing into Europe from major tech players like Nvidia expanding technology centers across the continent, the future for European stocks facilitating AI appears promising. As one analyst aptly put it, the race for AI is akin to a marathon, indicating that monetization will gradually increase over time.