Jefferies downgrades European software stock targets amid AI headwinds

Investing.com - Jefferies, a brokerage firm, has lowered the target prices for the entire European software sector, noting that AI-driven optimism is fading and rising geopolitical risks are putting pressure on demand and valuations.

Analyst Charles Brennan said, “The sector is currently struggling to find positive news.” He added that early concerns about artificial intelligence have now been replaced by macroeconomic and geopolitical uncertainties.

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The sector’s stock prices have fallen sharply, with companies covered by Jefferies declining an average of about 19% this year, mainly due to AI-related concerns.

Brennan stated that although worries about AI disruption still relate to market sentiment, the brokerage says “there is currently no evidence that it has a substantial impact on short-term trading,” with recent risks now shifting to macro factors.

The escalation of tensions in the Middle East is seen as a key headwind. The analyst noted that clients may be more focused on “ensuring energy and supply chain resilience rather than signing strategic software contracts,” which introduces downside risks, especially during the first-quarter earnings season.

Against this backdrop, Brennan has roughly reduced the average target price by 10%, reflecting both the weakening stock prices and the pressure on valuation frameworks based on free cash flow yields. He also emphasized structural valuation gaps across regions, pointing out that “Europe has limited growth premiums,” contrasting with the U.S. market.

The analyst added, “This is an inconsistency, and we believe investors should take advantage of it. Our preference in this sector is for the fastest-growing companies.”

At the individual stock level, Jefferies continues to favor faster-growing companies. Sage remains “one of the better performers in Q1,” supported by its AI monetization capabilities and limited exposure to extended sales cycles.

SAP is viewed as relatively resilient due to its embedded systems, although recent order intake may face delays amid macro uncertainties.

Additionally, Amadeus is expected to face short-term disruptions due to reduced airline activity related to geopolitical tensions, while Temenos faces greater uncertainty because of its exposure in the Middle East and Africa.

Brennan wrote that, meanwhile, Dassault Systèmes is considered one of the “worst combinations of low growth and expensive valuations” in the sector.

Among the major changes, Amadeus’s target price was lowered from €65 to €60. Dassault Systèmes was cut from €16 to €15. SAP saw the largest adjustment, with its euro-denominated target price lowered from €290 to €230, and its U.S.-listed shares from $340 to $270.

Temenos’s target price was slightly reduced from CHF 85 to CHF 83. Sage also saw a significant cut, from 1,350 pence to 1,100 pence.

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