- 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.
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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.”
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.
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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%.