The installation of graphics processing units (GPU) and associated equipment by data centers, which assist their corporate clients in developing the new technology, remains the main focus of investor excitement over generative artificial intelligence. The market leader is still Nvidia Corp. (NVDA). However, a long-term investment could be better off considering what businesses will really use the technology for.
Since 2009, Nicole Kornitzer has managed the Buffalo International Fund BUFIX portfolio. While Kornitzer Capital Management, which oversees the Buffalo Funds, is headquartered in Mission, Kansas, she is located in Paris. Kornitzer Capital Management manages around $7 billion in assets for institutional and private clients as well as through mutual funds. Nicole’s father, John Kornitzer, established the company in 1989.
The assets managed by the Buffalo International Fund are approximately $915 million. In Morningstar’s “Foreign Large Growth” category, it earns the second-highest rating of four stars. The fund falls into that group, although Kornitzer’s approach includes businesses of all sizes. With roughly 10% exposure to developing countries, the portfolio is concentrated on developed nations outside of the United States.
Kornitzer pointed out to MarketWatch three firms owned by the fund that offer systems, consulting, or other services to businesses looking to deploy generative AI.
According to Kornitzer, Capgemini SE (FR:CAP), a French corporation, is “a global consulting company that competes with Accenture PLC (ACN).” The business provides a range of services to assist other businesses in developed markets with integrating new technology to enhance or create new work procedures, services, and goods.
Approximately 20% of Capgemini’s operations are conducted domestically, according to Kornitzer. “Due to the uncertainty, some French businesses have postponed investments. Companies should be more willing to invest as the political landscape clears up,” she said.
Because Capgemini’s stock has been trading at historically low multiples, Kornitzer responded in the affirmative when asked if she was happy with the company’s current value. The consensus earnings-per-share forecast for the next 12 months among analysts surveyed by FactSet places the company at a forward price-to-earnings ratio of 13.3. Capgemini’s average forward P/E valuation for the last five years has been 16.2.
Enterprise-resource planning software provider SAP SE (SAP) of Germany is another business leading the corporate AI trend. “Their clients are switching to the cloud from licensing. With 80% of their income coming from recurring sources, they are currently a steady company with rising free cash flow and improved margins, according to Kornitzer.
SAP is in “a sweet spot” as it integrates “AI agents” into its core software platform, according to her. According to her, SAP is utilizing AI to increase its productivity, which will further boost its profit margins.
Kornitzer describes BayCurrent Inc. (JP:6532), another AI implementation business she owns in the Buffalo International Fund, as “a pure play” on the AI trend in Japan, where “digitization is underpenetrated.”
“The foundation of applying AI is data normalization. Your data must be in a consistent digital format. According to her, Japan is still in the process of undergoing a digital transition.
Further investigation revealed that BayCurrent was changing into a less cyclical company with longer-term service agreements, according to Kornitzer.
This is an overview of the three firms’ forward P/E ratios and anticipated compound annual growth rates for sales and profits per share, based on analyst consensus projections surveyed by FactSet.
Capgemini trades at the lowest forward P/E of the three, which is not surprising given the lowest projections for revenue and EPS growth. The most costly is SAP, which is “trading at pretty high multiples, similar to U.S. peers,” according to Kornitzer. However, its estimated two-year EPS CAGR is extremely high. In contrast, the STOXX Europe 600 (FXXP00) and the S&P 500 SPX are expected to expand their EPS at 3.4% and 5.8%, respectively, between 2024 and 2026.
The benchmark of the Buffalo International Fund, the FTSE All-World x U.S. Index, does not have consensus forecasts available from FactSet. However, the anticipated EPS CAGR for the Vanguard FTSE All-World ex-U.S. Index ETF VEU is 4.7% through 2026.
Therefore, the values show that investors get what they pay for, even though the growth expectations may make BayCurrent appear like a relative steal.
Europe’s more appealing values
Mark Hulbert recently emphasized the significance of increasing exposure to European stocks for U.S. investors. In contrast to the extremely concentrated S&P 500, this can offer some diversification. Additionally, European stocks are outperforming the U.S. this year and are still selling at significantly lower P/E ratios after years of underperformance.
“Valuation is a major theme,” Kornitzer stated in reference to securities in Europe. “Many businesses are performing on par with their American counterparts, but they are trading at lower multiples. A portion of that might be explained by higher taxes in Europe or fewer prospects for margin expansion due to cheaper expenses in the United States.
She emphasized that big businesses in Europe had global business strategies. In France and Germany, a considerable number of publicly traded companies have comparatively little exposure to their home countries.
Therefore, you are purchasing more than just Europe when you purchase a fund with European exposure. You are purchasing international companies, some of which are quite profitable in the United States,” she stated.
Additionally, Kornitzer stated that boosting consumer confidence in Europe might lead to the release of “a ton of household savings.” The French government’s capacity to be “on track to have a budget,” along with the outcome of the German elections, might result in policies that are “more pro-growth and pro-investment,” she said, and boost business and consumer confidence.
Kornitzer stated that “if we see a bottoming in China,” another trigger might be offered to European businesses. One of the Buffalo International Fund’s assets, Siemens AG (XE:SIE), for instance, reported a rise in orders for automation equipment in China, she noted. “That would suggest their automation business can improve this year for upside to estimates,” she stated.
The denominator of a stock’s forward price-to-earnings ratio is consensus projections for earnings per share. In order to sustain growing stock prices over the long run, investors always hope to see rolling 12-month EPS projections continue to rise.
