Investing.com — Media reports that Silver Lake may be interested in acquiring could catalyse investor interest in European software stocks by prompting a re-examination of the AI-driven concerns that led to the sector’s earlier sell-off.
Reuters reported on Aug. 13 on Silver Lake’s potential interest in Workday, a deal covered by Citi analyst Steven Enders.
Citi Research analysts said the news would prompt investors to assess how much those AI concerns have materialised, how different software companies have performed and what is already reflected in current prices following the sector’s recent rally.
Despite the pace of AI evolution and related disruption concerns, application software companies have largely shown resilient financial performance, Citi said.
While AI commercialisation has yet to visibly materialise, companies have been realising employee productivity gains that are supporting margin improvement, according to the note.
Citi said European software valuations still reflect a “growth-cratering” scenario and, while potential “go-private” candidates in the region are arguably limited, the firm expects shares to react positively to the Workday news. is Citi’s top European software pick.
The software sector has seen a sharp re-rating over the past three weeks, since and SAP reported results on July 23-24, driven by relief over continued resilience from trough valuation levels and a rotation away from AI capex-related uncertainty, Citi said.
Sector valuations remain meaningfully lower than last year and substantially below their historical average.
Citi said it continues to see relevance in its three-vector framework: positioning with respect to AI resilience, moat and price risk versus monetisation; demand and execution as reflected in the direction of estimate revisions; and valuation based on the growth expectations embedded in current prices.
Given the size of European software companies and their shareholding structures, including significant founder and family holders in many cases, Citi said it sees limited names in its coverage that would appear to be potential acquisition targets.
Still, the brokerage expects the market to view potential private equity interest in taking a global SaaS player private as a statement of confidence in the sector.
Citi’s reverse discounted cash flow analysis suggests current European software share prices are embedding a material mid-term growth deceleration to an anemic terminal growth rate, well below current mid-term growth targets and expectations, the note said.
Citi cited SAP as its highest-conviction pick, citing low AI disruption risk, the appeal of earnings compounding and relative valuation with room for expansion.
Companies mentioned in the note include Adobe, Autodesk, Dassault Systemes, Intuit, Nemetschek, PTC, Sage Group, Salesforce, SAP, ServiceNow and Workday.