SAP Stock will be boosted by the cloud
Next year, the German enterprise software giant
will celebrate its 50th anniversary. Investors should consider scrapping the party.
Founded in 1972 by a group of former IBM software engineers, SAP sells enterprise resource planning software. ERP software helps businesses manage their day-to-day operations, including accounting, compliance, supply chains, and other financial functions. SAP (ticker: SAP) and rival
(ORCL) have long been leaders in the $ 40 billion industry.
Historically, ERP software was run in corporate data centers, but the cloud is making those on-premises installations more and more obsolete and forcing ERP vendors to adjust their strategy. Oracle has outstripped SAP in the cloud transition: In the last quarter, Oracle’s flagship cloud-based Fusion ERP software revenue grew 46%, while SAP’s overall cloud revenue grew by 7%. %.
The pivotal moment for SAP investors came in October, when the company warned that the pandemic was having a bigger impact on its business than expected. The company surprised investors with reduced expectations, triggering a sell-off of 23% of the stock.
In 2020, SAP saw its first drop in revenue since 2009. This year, revenue is expected to be up slightly to 27 billion euros ($ 32 billion), with profit roughly stable at € 5.32 per share.
SAP is committed to accelerating its transition to the cloud. Transformation will take time, and this is where the opportunity lies.
In an interview with Barron, CEO Christian Klein said SAP expects to triple its cloud revenue by 2025. While some of this will come from moving existing customers to the cloud, he said 40% of cloud revenue came from winning new customers.
This is a pivotal moment for Klein, 41, who is one of the youngest leaders in the software industry. The German-born executive had spent his entire career at SAP before being appointed co-CEO in 2019 with Jennifer Morgan, an American executive who joined SAP in 2004. Morgan’s tenure was short-lived, however, and Klein was was appointed sole CEO in April. 2020.
Klein leads SAP through tumultuous times; As he notes, moving to the cloud still brings short-term financial reporting issues.
(MSFT) experienced similar difficulties in the short term, but investors ultimately rewarded their transitions.
“The nature of cloud business is that you recognize income over time against all of the earliest,” Klein explains.
“In the first quarter, we have already seen [our] the cloud revenue backlog, which is a future indicator of our revenue stream, ”adds the CEO. “In the second quarter, we will see an acceleration in cloud revenues. ”
SAP reports these second quarter results on Wednesday. Wall Street expects quarterly revenue of € 6.68 billion, down from a year ago, with profits of around € 1.20 per share.
But the cloud’s progression is evident in other metrics. “In the first quarter, after announcing the change in strategy to the cloud, we had the highest order intake in five years, and the cloud backlog grew sharply,” said Klein, who notes that a aggressive new strategy to accelerate customer adoption of cloud versions of its software, dubbed RISE, is paying off. “We tell customers, don’t just make a technical move, we’re really transforming your business. ”
SAP has even more to convince. SAP actions have lagged behind Oracle, the overall software industry and the vast market since the start of the pandemic. Over the past 18 months, SAP has grown 9%, while Nasdaq Composite has grown 58% and Oracle 61%.
In a June meeting with analysts, SAP said it forecasts average cloud growth of more than 22% per year through 2025, including 14-18% growth this year. Cloud revenues are expected to represent more than 60% of revenues by 2025, according to SAP, doubling the level of 2020.
Analysts have started to heat up at the reinvention of SAP. BofA Global Research analyst Frédéric Boulan recently gave the stock a rare double upgrade – Buy From Underperform – based on the company’s progress in migrating more businesses to the cloud.
“The market is struggling to navigate cloud migrations,” Boulan wrote in his research note. “The initial impact of not selling a $ 100 onsite license, but instead selling a $ 40 annual subscription, alters everything from revenue to margins. However, the return on investment is generally positive after three to four years. Boulan cites the ability to sell new services, greater customer satisfaction through cloud-based upgrades and more predictable results overall.
Sure enough, SAP’s revenue could grow at double-digit rates by 2025, when Wall Street currently expects total revenue of $ 37 billion.
In the meantime, investors are likely neglecting other parts of SAP’s business. Earlier this year, SAP divested a minority stake in
(XM), the experience management software company it acquired for $ 8 billion in 2018. SAP owned 82% of its stake in Qualtrics, a position that is now worth around $ 14 billion, or roughly 8% of the market value of SAP.
SAP also owns Concur, the travel and business expense management company, which it bought for more than $ 8 billion in 2014. Concur has weighed on results in recent quarters as business travel is on the rise. largely closed, but Klein anticipates a possible recovery. . “Concur will return to the levels we had before the pandemic very soon,” he says.
Boulan has a sum of parts value of € 150 on the German-listed shares of SAP, which is up almost 20% from recent levels.
SAP believes it has the right cloud strategy and, unlike Oracle, has no interest in building a public cloud business to compete with Microsoft Azure and Amazon Web Services. The good news is that these public clouds are increasingly used to run SAP software.
“Infrastructure has never been our business,” says Klein. “We want to own the application layer. And with billions of workloads, we get very attractive prices [from the public clouds]. Customer satisfaction is at an all time high. The strategy is working.
And if the strategy works, the stock will too.
Write to Eric J. Savitz at [email protected]