In this article, we discuss Morgan Stanley’s 15 best European AI stocks.
In August last year, investment bank Morgan Stanley released an investor note highlighting that even though the chaos around prominent AI firms had somewhat subsided, an AI rumbling in Europe was just about to begin. Analysts at the investment firm compared the AI buzz to historical similarities in the mid-1990s, just before the internet craze. According to Morgan Stanley analysts, European semi stocks were experiencing a tactical correction and would hit new highs in the coming months. The note further detailed that a basket of these equities, handpicked by these experts, and nicknamed AI winners, had returned close to 45% on average since January 2023, the beginning of the AI revolution. These firms had outperformed the 14% jump recorded by the MSCI Europe benchmark, per the research.
Read more about these developments by accessing 10 Best AI Data Center Stocks and 10 Buzzing AI Stocks According to Goldman Sachs.
In the months since, European AI stocks have experienced significant volatility, most recently influenced by global developments and investor sentiment. A notable event was the introduction of a low-cost AI model by Chinese startup DeepSeek, which raised concerns about the profitability of existing AI companies that rely on expensive chips and infrastructure. This led to a sharp decline in European tech stocks, with the European tech index dropping 5.8%, marking the worst decline since October 2024. However, the market showed resilience shortly after. European shares reached a record high, driven by gains in retail and utilities stocks as tensions in the tech sector subsided. European stock pickers are exploring established sectors such as utilities, professional data providers, and even copper miners to tap into the next wave of AI advancements. This approach reflects a strategic shift towards industries that can support and benefit from AI infrastructure and applications.
Read more about these developments by accessing 30 Most Important AI Stocks According to BlackRock and Beyond the Tech Giants: 35 Non-Tech AI Opportunities.
For this article, we selected companies based in Europe that have been benefiting from the AI boom. An important investor note by investment bank Morgan Stanley on European AI stocks formed the basis for this list. These stocks are also popular among hedge funds. Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).
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Morgan Stanley’s Best European AI Stocks
15. Infineon Technologies AG (OTC:IFNNY)
Number of Hedge Fund Holders: N/A
Infineon Technologies AG (OTC:IFNNY) designs, develops, manufactures, and markets semiconductors and semiconductor-based solutions worldwide. The firm reported revenues of approximately €15 billion for the fiscal year ending September 30, 2024. This represents an 8% decline from the previous year. Infineon is actively developing energy-efficient, high-performance, and reliable AI applications across various sectors, including the Internet of Things (IoT), consumer electronics, industrial applications, and the automotive industry. Additionally, Infineon is piloting a new AI developer model by Archetype AI to enhance sensor data analysis. This model uncovers hidden patterns in unstructured sensor data and combines real-time sensor inputs with natural language processing.
14. EDP, S.A. (OTC:ELCPF)
Number of Hedge Fund Holders: N/A
EDP, S.A. (OTC:ELCPF) engages in the generation, transmission, distribution, and supply of electricity in Europe, South America, North America, and internationally. It is based in Portugal. The firm has demonstrated a strong financial performance in recent periods, with a notable 14% increase in net consolidated profit for the first nine months of 2024, reaching €1.08 billion. A significant aspect of EDP’s strategy involves the integration of AI to enhance operational efficiency and support the global energy transition. Since 2019, EDP has identified 239 initiatives related to data analytics and AI, underscoring its commitment to technological innovation. These AI initiatives are designed to optimize various facets of EDP’s operations, including predictive maintenance, energy distribution, and customer engagement.
13. Glencore plc (OTC:GLNCY)
Number of Hedge Fund Holders: N/A
Glencore plc (OTC:GLNCY) is a United Kingdom-based firm that engages in the production, refinement, processing, storage, transport, and marketing of metals, minerals, and energy products. It is one of the leading copper miners in the world. Glencore reported a copper production of more than 1 million metric tons in 2023. In the second half of 2024, the firm posted copper production of 489,000 tonnes, nearly 6% higher than the first half of 2024. Copper demand has surged due to the AI trends sweeping the business world. According to commodity trader Trafigura, copper demand linked to data centers and AI could add up to one million tons by 2030. This, in turn, would lead to supply deficits, driving prices upwards. Glencore is in a prime position to capitalize on these tailwinds.
12. Fortum Oyj (OTC:FOJCY)
Number of Hedge Fund Holders: N/A
Fortum Oyj (OTC:FOJCY) engages in the generation and sale of electricity and heat in the Nordic countries, Sweden, Germany, the United Kingdom, the Netherlands, and internationally. It is based in Finland. One notable AI initiative of the firm is the development of a tool that classifies requirements into predetermined categories, significantly accelerating the requirements engineering process. This advancement is particularly beneficial for Fortum’s nuclear engineering tasks, as it streamlines requirements classification, thereby enhancing operational efficiency. Additionally, Fortum has implemented AI to predict heat demand within its district heating networks. By analyzing weather patterns, human behavior, and energy flows, the company can optimize heat production and supply.
11. Iberdrola, S.A. (OTC:IBDRY)
Number of Hedge Fund Holders: N/A
Iberdrola, S.A. (OTC:IBDRY) is a Spanish firm that engages in the generation, transmission, distribution, and supply of electricity in Spain, the United Kingdom, the United States, Mexico, Brazil, Germany, France, and Australia. Iberdrola’s financial performance demonstrates significant growth, with a reported net profit of €5.5 billion and an EBITDA of €13.3 billion in the first nine months of 2024. This success is partly attributed to the company’s strategic investments in AI to enhance operational efficiency and customer engagement. Collaborating with AWS, Iberdrola is developing generative AI applications to optimize energy production. AI data centers have created a need for power that is likely to drive utility firms towards the upgradation of their existing capacities to accommodate rising demand.
10. Roche Holding AG (OTC:RHHVF)
Number of Hedge Fund Holders: N/A
Roche Holding AG (OTC:RHHVF) is a Swiss firm that engages in the pharmaceuticals and diagnostics businesses in Europe, North America, Latin America, Asia, Africa, Australia, and Oceania. The firm has a notable emphasis on integrating AI into its operations. The company is leveraging machine learning across various disease areas and therapeutic modalities to create predictive, generative, and interpretable models. In the realm of diagnostics, Roche has expanded its digital pathology capabilities by integrating over 20 advanced AI algorithms from eight new collaborators. Furthermore, Roche has entered into a collaboration with PathAI to develop AI-enabled digital pathology algorithms. These AI initiatives align with Roche’s financial growth, as evidenced by a 9% increase in third-quarter sales in 2024.
9. The Sage Group plc (OTC:SGGEF)
Number of Hedge Fund Holders: N/A
The Sage Group plc (OTC:SGGEF) provides technology solutions and services for small and medium businesses in the United States, the United Kingdom, France, and internationally. The company is headquartered in the United Kingdom. Last year, analysts at JPMorgan had placed the firm among a basket of European equities that would emerge as a winner from the AI boom. In the past six months, the share price of the company has jumped by more than 27%. Steve Hare, the CEO of the firm, has attributed the strong revenue growth of his business in 2024 to innovation, like the introduction of latest AI-powered solutions, as well as disciplined cost control. Per Hare, this drove efficiency leading to good levels of margin expansion and a significant uplift in EPS and free cash flow.
8. Merck KGaA (OTC:MKGAF)
Number of Hedge Fund Holders: N/A
Merck KGaA (OTC:MKGAF) is a multinational science and technology company headquartered in Germany. The chips division of the company contributes nearly 12% to the overall sales. In August 2024, Thibault Boutherin of Morgan Stanley noted that AI-related demand would accelerate growth for the electronics business of the firm in the coming months. The management of the firm hopes to achieve an annual growth rate of 7% to 10% in the medium term. The analyst had a price target of €200 on the shares, denoting an upside potential of 20%. Boutherin added that the firm could achieve growth targets driven by higher demand for complex materials for AI semiconductor manufacturing. Six months after this thesis was published, the stock has declined by more than 11%.
7. SEGRO Plc (OTC:SEGXF)
Number of Hedge Fund Holders: N/A
SEGRO Plc (OTC:SEGXF) is a UK-based Real Estate Investment Trust (REIT). It is a leading owner, manager and developer of modern warehouses and industrial property. The real estate portfolio of the firm includes 34 data centers that contribute close to 10% to the total revenue. Morgan Stanley has described the firm as the landlord of the largest cluster of data centers in Europe. Six months ago, Morgan Stanley analyst Bart Gysens was bullish on SEGRO Plc (OTC:SEGXF) and had a 1,050 pence price target on the stock, implying upside potential of around 19%. Gysens, in an investor note, detailed that the real estate firm had ambitious plans to grow in the data center space, with a pipeline including projects worth £200 million of future rent to be delivered over the next decade. In the months since, the share price has fallen 21%.
6. Orange S.A. (OTC:ORANY)
Number of Hedge Fund Holders: 7
Orange S.A. (OTC:ORANY) provides various fixed telephony and mobile telecommunications, data transmission, and other value-added services to customers, businesses, and other telecommunications operators. The firm has demonstrated solid financial performance, with a 1.6% increase in revenue and a 2.7% growth in earnings in the third quarter of 2024. This growth is attributed to strong sales momentum and an uptick in retail services. A significant contributor to this is Orange’s strategic integration of AI across its operations. Notably, AI-driven tools in contact centers have automated 30% of responses to simple inquiries. In the enterprise sector, Orange Business has launched Live Intelligence, a generative AI solution designed to help businesses of all sizes improve operational efficiency and customer experience.
5. RELX PLC (NYSE:RELX)
Number of Hedge Fund Holders: 15
RELX PLC (NYSE:RELX) provides information-based analytics and decision tools for professional and business customers. It operates in the United Kingdom. The firm has demonstrated robust financial performance in recent years, significantly driven by the strategic integration of AI across services. A substantial portion of this growth is attributed to AI-powered analytics. In the first half of 2024, the company reported a 10% increase in adjusted operating profit, reaching £1.58 billion, with revenues climbing to £4.64 billion. CEO Erik Engstrom highlighted that this success stemmed from a strategic focus on advanced analytics and decision tools. The company’s commitment to AI is further evidenced by its digital transformation, with 84% of revenues now derived from digital sources.
4. STMicroelectronics N.V. (NYSE:STM)
Number of Hedge Fund Holders: 18
STMicroelectronics N.V. (NYSE:STM) is a Swiss firm that designs, develops, manufactures, and sells semiconductor products in Europe, the Middle East, Africa, the Americas, and the Asia Pacific. In August last year, Morgan Stanley analyst Lee Simpson had an Equal Weight rating on the stock with a price target of €35. Simpson, although optimistic about the long-term outlook, was skeptical about near-term catalysts for the stock. In a note, the analyst highlighted that the pressure on the shares, due to the long-running nature of a cyclical trough, would continue until 2025. Presently, the shares are trading at around €23. In earnings for the year 2024, the firm recently reported net revenues of $13.27 billion, gross margin of 39.3%, operating margin of 12.6%, and net income of $1.56 billion.
3. Rio Tinto Group (NYSE:RIO)
Number of Hedge Fund Holders: 30
Rio Tinto Group (NYSE:RIO) engages in exploring, mining, and processing mineral resources worldwide. It is headquartered in the United Kingdom. The firm has a thriving copper business. Copper is an important part of the AI data center build. It is used in many electronics and chips that power these centers. Major hyperscale firms have committed billions towards the development of AI data centers in the past few years. Copper futures have boomed as a result. However, in recent weeks, shares of European copper firms have fallen on the back of reports that the Trump administration will impose tariffs on the import of the metal into the US. Rio stock has fallen close to 6% since the Morgan Stanley AI report in August. Some of this decline can also be attributed to the lower AI and chip demand following the DeepSeek breakthrough.
2. SAP SE (NYSE:SAP)
Number of Hedge Fund Holders: 36
SAP SE (NYSE:SAP) is a German firm that provides applications, technology, and services worldwide. Back in August, Morgan Stanley analyst Adam Wood noted that SAP SE was well-positioned to capitalize on the emerging generative AI market opportunity. Wood believed this was because of the large quantity of business data that the firm had and the AI functionality it powered that data with, which was embedded into core products already. Morgan Stanley had a target price of €224 on the stock, signifying upside potential of over 18%. In the six months since this report came out, the stock has climbed close to 40% in value, blowing past the price target as the firm launched a number of AI-focused products, including Joule, a virtual AI assistant. The assistant is designed to help the customers of the firm intelligently sift through their enterprise resource planning data.
1. ASML Holding N.V. (NASDAQ:ASML)
Number of Hedge Fund Holders: 64
ASML Holding N.V. (NASDAQ:ASML) is a Netherlands-based firm that makes and sells advanced semiconductor equipment systems. Back in August, Morgan Stanley named the firm among a basket of equities that comprise the European AI shopping list. Morgan Stanley had a $1,092 price target on the stock, implying upside potential of an impressive 27%. Analyst Lee Simpson highlighted that ASML had a monopoly in leading-edge lithography equipment. However, despite this monopoly, or maybe because of it, the company has come under increased governmental scrutiny. In the past six months, the US and Dutch governments have placed additional curbs on the sale of lithography equipment to China. ASML stock has declined by more than 17% since early August and is presently trading at around $712.
While we acknowledge the potential of ASML Holding N.V. (NASDAQ:ASML) as an investment, our conviction lies in the belief that some stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for a stock that is more promising than ASML Holding N.V. (NASDAQ:ASML) but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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