European investors say clock is ticking for AI adopters to deliver

European investors are closely watching companies that have heavily invested in artificial intelligence (AI), expecting them to start demonstrating financial returns soon. While AI continues to reshape industries, the pressure is mounting for these companies to justify the high valuations that have accompanied their ambitious adoption strategies.

Shifting Investor Focus

In recent months, AI-related stocks have faced turbulence due to growing concerns over a potential economic downturn. This instability was amplified in January with the introduction of the cost-effective DeepSeek AI model from China, which triggered a selloff in the tech sector. Despite this, investor sentiment remains strong for AI, though preferences are shifting from AI hardware suppliers to companies that are effectively incorporating AI into their business operations.

Notably, investors are gravitating towards firms that leverage AI for increased efficiency rather than those that manufacture chips and other AI-enabling components. Companies like the information services giant RELX and software provider SAP are now seen as more promising than chipmakers, which face challenges from evolving AI technology that reduces dependency on high-cost hardware.

Pressure to Show Results

While AI adoption is still in its early stages, investors are no longer satisfied with mere promises of innovation. They want to see tangible financial benefits, and patience is wearing thin. Companies that fail to deliver measurable returns on their AI investments by next year risk losing investor confidence.

The demand for performance is particularly evident in the European market, where AI-exposed stocks are more limited compared to the U.S. Companies like London Stock Exchange Group (LSEG) and RELX have seen only moderate declines in stock value, while AI hardware providers such as ASM International and BE Semiconductor have faced steeper losses. German software giant SAP, which recently surpassed Novo Nordisk to become Europe’s most valuable company, has demonstrated resilience by effectively integrating AI into its offerings.

Market Valuations and Investor Patience

Despite investor enthusiasm for AI, market valuations remain a concern. AI-focused stocks trade at significantly higher price-to-earnings ratios than the broader market. For example, the STOXX 600 index has an average price-to-earnings ratio of 17, whereas AI adopters such as SAP and LSEG are valued at over 90 times earnings. These high valuations mean that companies must soon justify their worth through increased revenues and profitability.

A survey conducted in January among over 100 Fidelity analysts revealed that nearly three-quarters of them expected AI to have minimal impact on company profitability in 2025. However, the longer-term outlook is more optimistic. Portfolio managers at leading investment firms insist that while 2025 may still be a year of beta testing and gradual implementation, by 2026, AI adopters must demonstrate clear financial gains.

Steve Wreford, a senior portfolio manager at Lazard Asset Management, warns that unchecked AI investments without visible returns could lead to investor fatigue. While management teams may temporarily reassure shareholders by promising better results in the next quarter, failure to deliver by the end of 2025 could lead to scepticism and declining valuations.

The Need for Strong Use Cases

For AI investments to be sustainable, companies must develop compelling use cases that justify continued spending. The real test for AI will be its ability to create applications that businesses and consumers find valuable enough to pay for.

Paddy Flood, a portfolio manager at Schroders, believes that while AI’s potential is enormous, only those companies that implement practical and monetizable AI applications will thrive. The absence of a breakthrough or “killer” AI use case could hinder growth and shake investor confidence.

Similarly, Fabio di Giansante, head of large European equities at Amundi, emphasizes that European AI investments are already priced at a premium due to their limited availability. However, most of the industry’s focus so far has been on infrastructure and capital expenditure. To maintain investor interest, companies must begin showcasing AI’s impact on revenue and profit margins.

The Year of Reckoning

As AI integration accelerates across industries, 2025 could be a pivotal year. If AI adopters fail to deliver substantial financial benefits, investor sentiment may turn negative, leading to reassessments of company valuations.

In this high-stakes environment, companies that can successfully leverage AI to drive efficiency, reduce costs, and generate new revenue streams will be the ultimate winners. The next year will determine whether AI remains a game-changer or if the hype begins to fade.