We recently compiled a list of the 15 Best European AI Stocks According to Morgan Stanley. In this article, we are going to take a look at where Merck KGaA (OTC:MKGAF) stands against the other European AI stocks approved by Morgan Stanley.

There are several ways that investors are approaching the artificial intelligence (AI) boom that has been sweeping global markets since the end of 2022. The most obvious bets have been placed in sectors like semiconductors, software, and biotechnology, at least that is what investors in the United States have been up to. However, the habits of their European counterparts seem a tad different. Across the pond, stock pickers have been making bull calls on more established names to ride the AI wave, namely the utilities, commodities, and professional data providers, among others. Economic experts are describing this as the next phase of investments in the AI universe.

For example, Bernie Ahkong, an analyst at UBS, recently noted that the first phase of AI was interest towards chipmakers (read more about this by accessing 33 Most Important AI Companies You Should Pay Attention To). In the second phase, investors moved towards the industrial companies (read more about this by accessing 20 Industrial Stocks Already Riding the AI Wave) which actually supply the components to the data centers. The present tilt towards utility and power firms is quite possibly the third phase of this AI focus. Analysts at investment bank Morgan Stanley echo these sentiments. In a recent investor note to clients, released last week, these expert stock pickers underlined that even though the chaos around prominent AI firms has somewhat subsided, an AI rumbling in Europe is just about to begin. They attribute it to historical similarities to the mid-1990s, just before the internet craze.

According to Morgan Stanley analysts, European semi stocks are experiencing a tactical correction and should make new highs in the coming months. A basket of these equities, handpicked by these experts, and nicknamed AI winners, has returned close to 45% on average since January 2023, the beginning of the AI revolution. These firms, some of which are discussed in detail below, have outperformed the 14% jump recorded by the MSCI Europe benchmark, per the research. One indication of this is the demand for data centers. Kevin Restivo of CBRE recently highlighted that demand for data center space in Europe is set to outstrip delivery of new stock for the third straight year and AI demand will exacerbate the issue.

Our Methodology

For this article, we selected companies based in Europe who have been benefiting from the AI boom. An important investor note by investment bank Morgan Stanley on European AI stocks formed the basis for this list. These stocks are also popular among hedge funds. Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).

A technician soldering components for frequency control products in a modern electronics lab.

Merck KGaA (OTC:MKGAF)

Number of Hedge Fund Holders: N/A

Merck KGaA (OTC:MKGAF) is a multinational science and technology company headquartered in Germany, with about 60,000 employees and a presence in 66 countries. The company has an underappreciated electronics business, with the chips division already contributing to almost 12% of the overall sales. As demand for AI chips rises, this figure is likely to grow. The management of the firm hopes to achieve an annual growth rate of 7% to 10% in the medium term. In forecast for the present fiscal year, the firm expects net sales to be in a range of €20.7 billion to €22.1 billion, contributing to organic growth of 2% to 5%.

Merck KGaA (OTC:MKGAF) has invited bullish forecasts from analysts on Wall Street, with Thibault Boutherin of Morgan Stanley noting that AI-related demand would accelerate growth for the electronics business of the firm in the coming months. The analyst has a price target of €200 on the shares, denoting an upside potential of 20%. Boutherin added that the firm could achieve growth targets driven by higher demand for complex material for AI semiconductor manufacturing.

Overall MKGAF ranks 8th on our list of the best European AI stocks to buy according to Morgan Stanley. While we acknowledge the potential of MKGAF as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than MKGAF but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.

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Disclosure: None. This article is originally published at Insider Monkey.