On Thursday, Bernstein analysts highlighted key investment ideas for the European Software (ETR:SOWGn) & IT Services sector for the year 2025. According to their analysis, IT spending is expected to recover throughout the year, with the latter half seeing more significant improvements. Despite a lackluster performance in 2024, companies within Bernstein's coverage are projected to boost their margins even with limited revenue growth prospects. The analysts believe that current market valuations do not fully account for the sector's potential rebound in the second half of 2025.
The transition to cloud computing is identified as a central theme driving the sector, with an anticipated increase in cloud spending of approximately 20% year-over-year at constant currencies. Infrastructure as a Service (IaaS) is expected to lead this growth with an estimated 25% year-over-year increase, followed by Platform as a Service (PaaS) and Software as a Service (SaaS) with 19% and 17% increases, respectively.
The monetization of Generative AI, although in its nascent stages, is also expected to have a considerable indirect impact as businesses shift their data and systems to the cloud to harness the capabilities of AI and Generative AI. For detailed analysis of cloud computing leaders and their growth metrics, check out InvestingPro's comprehensive financial data and insights.
Software spending is projected to outperform services spending during the recovery phase, continuing a trend observed from 2009 to 2024 where software spending grew on average 4 percentage points per year faster than services. Gartner (NYSE:IT) Group forecasts a 11.7% year-over-year growth in software spending in Europe for 2025, compared to a 5.3% growth for services.
Bernstein analysts have identified SAP, Capgemini, and Dassault Systèmes as their top investment picks within the sector. SAP is praised for its S/4 product cycle, which is expected to drive top-line growth and margin expansion. Despite recent share price increases, Bernstein sees further potential for SAP, with a price target (PT) set at €247. Capgemini, trading at an attractive P/E ratio of 15.9x and offering a 1.75% dividend yield, is also favored for its potential to expand margins and rapidly accelerate growth once the recovery takes hold, with a PT of €219.
According to InvestingPro, the company maintains a "GOOD" financial health score and has strong analyst consensus. Lastly, Dassault Systèmes is anticipated to see gradual top-line growth improvement in 2025, maintaining an organic revenue growth close to 10%, and is expected to steadily improve margins, leading to a PT of €46.
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