Direct Investor | Financial Adviser | Institutional Investor

Market Insights | Investigating the European Technology Landscape

By Cornelius Zeeman & Christoff Marais,
Fairtree Portfolio Manager & Equity Analyst

Europe is generally not seen as a leader in the technological arena. It is often characterised as a market that only comprises companies from the “old economy”. Comparing the S&P 500’s composition to the STOXX Europe 600 Index reveals clear differences, as shown in Graph 1. The European index consists mostly of financials, health care and industrials. This is in comparison to the US, where technology, its largest sector, makes up 30% of the total index. This is almost four times larger than in the European index.

Graph 1: STOXX Europe 600 vs S&P 500 – sector weightings (%)

Source: Invesco

We recently had the opportunity to investigate this anomaly more closely by attending the Goldman Sach’s European Technology Conference. In attendance were companies such as Adyen, ASML and Capgemini, to name a few. Notably, these three companies have all outperformed the S&P 500 over a five-year period. We unpack these companies on a high level below.

Adyen.

 

Adyen is a Dutch payment processing company founded in 2006. They provide businesses of all sizes with a single, unified platform to accept payments across multiple channels, including:

  • Online: E-commerce websites, mobile apps and marketplaces
  • In-store: Point-of-sale terminals and contactless payments
  • Mobile: Mobile wallets like Apple Pay and Google Pay

Beyond payment processing, Adyen provides business-critical services like fraud prevention and risk management, empowering companies to navigate the complexities of the modern commerce landscape. Adyen’s customers include some of the world’s largest companies, such as Uber, Spotify and Microsoft.

Albeit slightly dated, the company has around a 20% market share in online payment volumes in Europe and continues to grow ahead of its peers, as shown in Figure 1 below.

Figure 1: Adyen acquiring volume market share and growth within Europe

 

Source: Bernstein

On the back of the company’s strong positioning in Europe, they decided to expand into the US market. The replication of the European strategy in the US continues to be debated, but early signs are promising, as shown in Figure 2 below. Like Europe, the company is also growing significantly ahead of its US peers.

Figure 2: Adyen acquiring volume market share and growth within the US

 

Source: Bernstein

At the conference, the company provided good reference points that increased our confidence in its ability to replicate its success in the US. One example was the recent customer win of Cash App’s US processing volumes. The company also noted that customers returned to their offering after peers employed aggressive pricing strategies. This strengthens our conviction in their superior offering within an industry sometimes mistakenly perceived as commoditised.

ASML.

 

AMSL, often referred to as “the most important technology company that you never heard of”, manufactures lithography machines, or “printers”, of the microchip world. They are incredibly complex and expensive devices, but they play a crucial role in creating the tiny transistors and circuits that power everything from your smartphone to your computer.

Figure 3: ASML EUV machine with an average price of around US$200 million

As technology has become a more integral part of our lives, ASML has been one of the main beneficiaries. This has allowed the company to grow revenue at a 10-year cumulative average growth rate of 18% per year while generating operating margins above 30%, as shown in Graph 2.

Graph 2: ASML’s revenue for the past 10 years

Source: Company financials

The company has benefitted in recent years from an increase in sales to Chinese customers, as shown in Graph 3. This increase is driven by the country’s attempt to create a self-sufficient semiconductor industry. The resilience of the strength, and whether the company will be able to continue to ship to China due to increased geopolitical pressures, is being debated. For more information on how geopolitics is impacting the semiconductor industry, read The Geopolitical Chess Game: China and the US in Semiconductor Strife.

Graph 3: China’s % of net systems sales

Source: Company financials

From the meetings, we gained confidence that the recent management changes will not impact the long-term strategic direction of the company. The company’s healthy reacceleration in its backlog which was driven by both memory and logic manufacturers was also discussed, and how this will influence revenue growth in the coming years. Lastly, management provided some clarity on the sudden increase in demand from China and the company’s ability to sustain this going forward.

Capgemini.

 

Capgemini is a leading global information technology consulting and services company headquartered in Paris, France. Founded in 1967, the company has grown into a multinational powerhouse with a presence in over 50 countries and a workforce exceeding 340 000 individuals.

The company provides the following core business activities:

  • Consulting and strategy: Assists clients in defining their digital transformation strategies.
  • Applications and technology: The company offers a broad range of services, including custom application development and cloud migration.
  • Business process outsourcing (BPO) and managed services: Aims to improve business processes and operational efficiency through the outsourcing of certain functions.

As shown in Graph 4 below, historically the company’s revenue growth had a very strong tie to GDP growth. This correlation has degraded in recent years as the company shifted itself to more resilient areas of spending. There has also been an overarching theme where IT spending has become less dependent on GDP growth due to the increasing importance of digital transformation initiatives.

Graph 4: Capgemini growth vs Euro area GDP growth (%)

Source: Goldman Sachs

Capgemini has a very large employee base and has nearly doubled its headcount since 2018. Even though the company has been such a large employer, it has done well in controlling costs, as evident by the steady cost per employee figure. This has contributed to the company improving its operating margins by ~400bp for the 10-year period.

Graph 5: Average headcount vs cost per employee

These examples illustrate that Europe also has innovative and industry-leading companies. We are constantly looking for new ideas that can generate excess returns for our investors. Conferences, like the one we attended, provide an opportunity for us to generate investment ideas by meeting management and sitting in on interesting debates.


Disclaimer:

Fairtree Asset Management (Pty) Ltd is an authorised financial services provider (FSP 25917). Collective Investment Schemes in Securities (CIS) should be considered as medium- to long-term investments. The value may go up as well as down and past performance is not necessarily a guide to future performance. CISs are traded at the ruling price and can engage in scrip lending and borrowing. A schedule of fees, charges and maximum commissions is available on request from the Manager. A CIS may be closed to new investors in order for it to be managed more efficiently in accordance with its mandate. Performance has been calculated using net NAV to NAV numbers with income reinvested. There is no guarantee in respect of capital or returns in a portfolio. Prescient Management Company (RF) (Pty) Ltd is registered and approved under the Collective Investment Schemes Control Act (No.45 of 2002). For any additional information such as fund prices, fees, brochures, minimum disclosure documents and application forms, please go to www.fairtree.com.

Recent Posts

Subscribe to receive our latest updates