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Stock Market GOLDMAN SACHS: Buy these 12 stocks set to soar at least 30% or more as they benefit from a surge of investment in Europe’s digital economy


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Stock Market GOLDMAN SACHS: Buy these 12 stocks set to soar at least 30% or more as they benefit from a surge of investment in Europe’s digital economy

Goldman Sachs equity analysts believe Europe’s digital economy is at a tipping point. In a January 7 report, the analysts lay out five reasons why they believe Europe will move from laggard to leader in digital. We list 12 key digital economy stocks picks that are set to benefit and have an upside of 30%…

Stock Market GOLDMAN SACHS: Buy these 12 stocks set to soar at least 30% or more as they benefit from a surge of investment in Europe’s digital economy

Stock Market

  • Goldman Sachs equity analysts believe Europe’s digital economy is at a tipping point.
  • In a January 7 report, the analysts lay out five reasons why they believe Europe will move from laggard to leader in digital.
  • We list 12 key digital economy stocks picks that are set to benefit and have an upside of 30% or more.
  • Visit Business Insider’s homepage for more stories.

Goldman Sachs believes Europe’s digital economy is at a tipping point.

In a new research note released on January 7, Goldman Sachs equity analysts take a look at why Europe might soon move from a laggard position to a leader in the digital economy space.

“Historically, the region has lagged behind North America and Asia when it comes to the digitalization of the economy, with no super platforms comparable to the FAANGs in the US and BATs in China; we believe this is partly due to the fragmented nature of Europe’s local markets, with differences in culture, language and regulatory settings making it more difficult for online businesses to achieve significant scale,” said Goldman Sachs lead analyst on the report, Lisa Yang.

The team base the dramatic shift on five factors:

1. A faster pace of adoption due to COVID-19

The pandemic has significantly accelerated digital adoption in Europe.

Across business to consumer verticals, the analysts believed that in 2020, three to five years of online penetration occurred.

In more immature digital markets, such as food in the UK, the penetration has been up to 10 years.

“Against the backdrop of the recent positive vaccine news, we believe much of the change is structural and see an accelerated path to reach longer-run equilibrium rates for online penetration,” Yang said.

2. Proliferation of key enabling technologies

To understand the digital economy landscape, the analysts mapped out the technology stack and key catalysts that will likely facilitate growth in Europe’s digital economy.

“From a technology perspective, we see cloud infrastructure, platform-as-a-service technology and networking technology as especially important to the rapid expansion of this sphere,” Yang said. “We argue that the landscape will continue to evolve, and scope out several avenues for technological development, for example the use of 5G/IOT technology, robotic process automation and VR as elements that could lead to further tangible digital economy opportunities.”

3. Improved availability of funding

The report looks not only at public markets but also at private, highlighting the investment being made in new technology and digital across Europe.

“Improved availability of VC funding and increased public market appetite for digital economy stocks in Europe have created more fertile ground for the creation and scaling up of online businesses, as demonstrated by the recent IPOs of The Hut Group and Allegro and the significant increase in the number of unicorns in Europe,” Yang said.

The report highlights that Europe has had more tech Initial Public Offerings than the US over the past five years. However, it is worth noting that the average deal size is often smaller.

And over the last three years, Europe’s venture capital investment has doubled, which is outpacing growth seen in the US and Asia, although still three times smaller than the other two regions, Yang said.

Read more: An ETF provider whose specialty funds have smashed the market breaks down how to capitalize on the red-hot SPAC craze — and shares 4 to watch in 2021

4. More supportive backdrop from policy makers

‘A Europe fit for the digital age’ is one of the European Commission’s six key political priorities, the report said, which demonstrates the Commission’s commitment to digital investment.

The analysts believe there will be a stronger push from policy makers at the regional and national level to create a level playing field between the European digital landscape and Big Tech. This will likely result in investment in digital capabilities and infrastructure.

At least 20% of the €672.5 billion EU Recovery & Resilience fund will be dedicated to support Europe’s digital transition, the report said. This amounts to around at least €134.5 billion of investment in the digital economy.

5. Industry consolidation

Industry consolidation is taking place ,as several European companies look to attain global leadership through large-scale and cross-border M&A, Yang said.

“Most recent examples include Adevinta in classifieds following the proposed acquisition of eBay Classifieds Group, Just Eat Takeaway in food delivery following the proposed acquisition of GrubHub and Flutter in sports betting following the acquisition of TSG,” Yang said. “We believe consolidation could become more widespread in certain sectors (e.g. telecoms) in a drive by governments to allow for higher returns/investments.”

Stock Market Stock picks

To capture the trend in investment, Goldman Sachs maintains a list of over 70 stocks exposed to the digital economy theme and features it within the report. The stock list makes up more than  30% of the STOXX 600.

“We believe investor appetite for European digital economy stocks will continue to be fueled by strong growth prospects,” Yang said.

Read more: Investing legend Terry Smith’s $30 billion equity fund returned 449% to investors over a decade — Here’s his 4-part strategy for success and 10 pieces of investing wisdom to take into 2021

The 154 page report also takes a deep dive into a range of industries including classifieds,  beauty, telecommunications and gambling to understand how the industries will shift as the transition is made and what companies are set to benefit.

The basket of digital economy stocks have delivered strong share price performance comparable to that of the FAANGs (Facebook, Amazon, Apple, Netflix, Google/Alphabet) and stronger than the BATs (Baidu Inc, Alibaba Group Holdings, Tencent Holdings), Yang said.

“We believe this [performance] is partly due to the relative scarcity of growth assets in the European investment universe, particularly relative to the US and China, with only 12% of companies in Europe having sales growth over 10%, compared with 30% in the US,” Yang said. 

From Goldman Sachs’ key digital economy stocks bucket, we list the 12 key stocks expected to benefit from the surge in digital investment and achieve an upside of at least 30% in the next 12 months, including one stock with an upside of 77%.

Stock Market 1. Prosus

Ticker: PROSF

Sector: Media

Digitization themes: Gaming, classifieds, food delivery, education

Price target: €133.00

Price target upside (%): 49%

Analyst commentary: 

“We also highlight Prosus (Buy, CL), which operates one of the world’s fastest-growing online classifieds groups, OLX (37%/108% proportionate revenue/EBITDA CAGRs 2020-24E), which has 300mn average monthly users and operates across 19 core markets, mostly in EM.”

“Prosus offers exposure to gaming through its 31% stake in Tencent (87% of target NAV), which is the largest online games company globally (in terms of revenue).”

“We also point to Prosus (Buy, CL) and its increasing focus on EdTech investments across the globe from the leading K-12 app in India (Byju’s) to online learning marketplace (Udemy), to social learning (Brainly, SoloLearn) and tech skills offerings (Code Academy).” 

Source: Goldman Sachs

Stock Market 2. Stillfront

Ticker: STLFF

Sector: Gaming

Digitization themes: Video games

Price target: 145.00 Swedish krona

Price target upside (%): 44%

Analyst commentary: “We believe the company’s ‘free to play’ approach, with no upfront fees but leveraging intelligent analytics to drive subsequent in app purchases, can maximise monetisation scope and hence growth.”

Source: Goldman Sachs

Stock Market 4. Deutsche Post DHL

Ticker: DPSTF

Sector: eCommerce Enablement

Digitization themes: Logistics

Price target: €53.00 

Price target upside (%): 32%

Analyst commentary: “Within the postal sector, we see Deutsche Post DHL (Buy, also on our Conviction List) as well positioned to leverage on the medium-term growth in B2C parcels, both in the traditional domestic parcels business (in Germany, as well as in some European and Asian markets) and in the premium parcels Global Express division, where three players dominate the global market (DHL, Fedex and UPS have a combined c.90% market share), but where Deutsche Post has a c.50% market share in the fast growing cross-border B2C segment.”

Source: Goldman Sachs

Stock Market 5. Deutsche Telekom

Ticker: DTEGF

Sector: Infrastructure 

Digitization themes: Telecommunications operators

Price target: €23.00

Price target upside (%): 52%

Analyst commentary: “If EU authorities approve in-market mobile consolidation, this should enable higher returns for European telecoms to allow them to become ‘digital champions’ with greater scope to invest – e.g. Vodafone and other large cap telcos.”

Source: Goldman Sachs

Stock Market 6. Ericsson

Ticker: ERIXF

Sector: Hardware

Digitization themes: Fixed access/wireless access hardware, core network software

Price target: 133.00 Swedish krona

Price target upside (%): 33%

Analyst commentary: “We see European wireless equipment vendors Ericsson and Nokia as potential beneficiaries of [5G/IOT], as well as industrial software vendors such as Hexagon and Dassault.”

Source: Goldman Sachs

Stock Market 7. Infrastrutture Wireless SpA

Ticker: IFSUF

Sector: Infrastructure 

Digitization themes: Tower companies

Price target: €13.60

Price target upside (%): 41%

Analyst commentary: “5G requirements for tower densification combined with EU financial support could boost towerco value creation opportunities – e.g. for Cellnex and INWIT – with the incremental cost to operators mitigated by EU and local financial support.”

Source: Goldman Sachs

Stock Market 8. Network International

Ticker: NWKLF

Sector: Payments

Digitization themes: Payments

Price target: £460.00

Price target upside (%): 52%

Analyst commentary: N/A

Source: Goldman Sachs

Stock Market 9. Poste Italiane

Ticker: PITAF

Sector: eCommerce enablement 

Digitization themes: Logistics

Price target: €12.60

Price target upside (%): 48%

Analyst commentary: “We are also Buy rated on Poste Italiane, where the overall B2C contribution to the group is still relatively small, but the company is gaining market share (currently c.35%) in what is one of the least penetrated of the larger European e-commerce and thus B2C parcel markets.”

Source: Goldman Sachs

Stock Market 10. Software AG

Ticker: SWDAF

Sector: Software 

Digitization themes: Analytics infrastructure/Internet of things infrastructure, middleware/database

Price target: €45.00

Price target upside (%): 36%

Analyst commentary: N/A

Source: Goldman Sachs

Stock Market 11. Teleperformance

Ticker: TLPFY

Sector: Business services/Analytics

Digitization themes: Business services

Price target: €365.00

Price target upside (%): 38%

Analyst commentary: “With its omni-channel, integrated customer care offering, which covers all types of media from chatbots to video calling, we see Teleperformance as a key enabler of growth for e-tailers. This has already driven strong organic growth for the company, with Teleperformance’s share of revenues from e-clients growing from 5% in 2013 to 21% in 2019 and 24% in 1H20. We see further significant growth potential for the company from these activities. We forecast a 10% organic revenue CAGR for Teleperformance over 2021-24, which we expect to help drive a further re-rating of the shares.”

Source: Goldman Sachs

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