Europe software stock targets cut at Jefferies on AI headwinds

Investing.com -- Brokerage firm Jefferies lowered price targets across the European software sector, flagging a mix of fading AI-driven optimism and rising geopolitical risks that are weighing on demand and valuations.

“The sector is struggling for good news at the moment,” analyst Charles Brennan said, adding that earlier concerns around artificial intelligence have now been overtaken by macro and geopolitical uncertainty.

Shares across the group are already down sharply, with companies in Jefferies’ coverage falling about 19% on average year-to-date amid AI-related concerns.

While fears around AI disruption remain relevant for sentiment, the broker said there is “no evidence today that it is meaningfully influencing short-term trading,” with near-term risks now shifting toward macro factors, Brennan said. 

The escalation of tensions in the Middle East is seen as a key headwind. The analyst said customers are likely focusing more on “ensuring energy and supply chain resilience than on signing strategic software contracts,” creating downside risk to expectations, particularly into the first-quarter reporting season.

Against this backdrop, Brennan cut price targets by around 10% on average, reflecting both weaker share prices and pressure on valuation frameworks based on free cash flow yields. He also highlighted a structural gap in regional valuations, noting there is a “limited premium for growth in Europe,” which contrasts with U.S. markets.

"This is an inconsistency that we think investors should exploit, and our preferences across the sector skew to the fastest-growing companies," the analyst added. 

At the stock level, Jefferies continues to favor faster-growing names. Sage remains “one of the better-placed names” in the first quarter, supported by its ability to monetize AI and limited exposure to elongated sales cycles.

SAP is seen as relatively resilient given its embedded systems, though near-term order intake could face delays due to macro uncertainty.

Elsewhere, Amadeus is expected to see short-term disruption from reduced airline activity linked to geopolitical tensions, while Temenos faces increased uncertainty due to its exposure to the Middle East and Africa region.

Dassault, meanwhile, is viewed as having “among the worst combinations of low growth and expensive valuation” in the sector, Brennan wrote.

Among key changes, Amadeus saw its price target reduced to €60 from €65. Dassault Systèmes was cut to €15 from €16. SAP had one of the largest revisions, with its euro-denominated target lowered to €230 from €290, while its U.S.-listed shares were cut to $270 from $340.

Temenos saw a smaller adjustment, with its target trimmed to CHF 83 from CHF 85. Sage also saw a notable cut, with its price target lowered to 1,100p from 1,350p.