Company Reports

We maintain our fair value estimate for narrow-moat SAP at EUR 132 per share after the firm reported a robust first quarter that topped our revenue and margin expectations. Management reaffirmed 2024 guidance and reiterated its 2025 ambition, which we believe are supported by continued strategic pivots toward the cloud and business artificial intelligence, or AI, segments. Overall, we see results as solid and a continuation of recent trends. Although we continue to expect some churn due to forced cloud migration, we maintain our belief in SAP’s strong suite of offerings and the inherent switching costs associated with core software systems. Shares already incorporate the full benefits of the cloud transition and are overvalued, in our opinion.

We are raising our fair value estimate for SAP to EUR 132 from EUR 119 after the firm reported a strong fourth quarter, beating our EPS expectations. Longer term, we continue to believe SAP’s otherwise strong switching costs will be restored once the bulk of enterprise workloads have moved to the cloud. However, we think the firm will experience an uptick in churn over the next 10 years as cloud migrations give way to rethinking IT strategies and software vendors. Management provided solid 2024 guidance as well as reiterating its 2025 targets, which we expect to be supported through its transformation roadmap involving greater strategic investment toward cloud and Business AI. While shares were up around 7% after these results, we still view the shares as overvalued.

SAP is a best-in-breed enterprise resource planning provider and holds dominant market share in global ERP software. However, SAP is phasing out its support of its on-premises ERP software such that by 2040 all of its ERP customers will need to shift to a cloud solution. We think that this vulnerability is a significant threat to SAP’s switching costs, as competitors like Workday offer compelling cloud ERP solutions, while forced migration opens up opportunity to question a company’s best fit for ERP needs. In turn, we believe SAP’s narrow moat, derived from its switching costs, is trending negative. However, it is still early in SAP's transition of on-premises users to the cloud, which leads us to believe its negative trend could be prolonged.

We are maintaining our fair value estimate for SAP at EUR 119 per share after the firm reported mixed third-quarter results, with revenue coming in under expectations combined with earnings per share beating our forecast. With the long term in focus, we continue to believe SAP’s otherwise strong switching costs will be restored once the major shift of enterprise workloads to the cloud is concluded. However, we think the firm will experience an uptick in churn over the next 10 years as cloud migrations give way to rethinking software vendors. Still, not all looks bleak for SAP in the years ahead. Even with increased churn, we expect healthy revenue growth over the next 10 years (aided by new software functionalities) along with ample operating margin expansion as cloud profitability improves with scale. Altogether, shares are up 4% upon results, leaving shares fairly valued, in our view.

SAP reported second-quarter results shy of expectations, as transactional revenue related to discretionary offerings—such as business expensing via Concur—performed worse than management was bracing for. SAP narrowed outlook ranges for the year slightly. We are maintaining our fair value estimate of EUR 119 per share ($132 for U.S. ADR shares given current exchange-rate changes) for this narrow-moat name, as we believe transactional revenue will be able to recover after the near-term macro slump. With shares down about 6% upon results, shares are approaching our fair value estimate. As a result, we recommend holding on to shares for the time being.

SAP is a best-in-breed enterprise resource planning provider and holds dominant market share in global ERP software. However, SAP is phasing out its support of its on-premises ERP software such that by 2040 all of its ERP customers will need to shift to a cloud solution. We think that this vulnerability is a significant threat to SAP’s switching costs, as competitors like Workday offer compelling cloud ERP solutions, while forced migration opens up opportunity to question a company’s best fit for ERP needs. In turn, we believe SAP’s narrow moat, derived from its switching costs, is trending negative. However, it is still early in SAP's transition of on-premises users to the cloud, which leads us to believe its negative trend could be prolonged.

SAP is a best-in-breed enterprise resource planning provider and holds dominant market share in global ERP software. However, SAP is phasing out its support of its on-premises ERP software such that by 2040 all of its ERP customers will need to shift to a cloud solution. We think that this vulnerability is a significant threat to SAP’s switching costs, as competitors like Workday offer compelling cloud ERP solutions, while forced migration opens up opportunity to question a company’s best fit for ERP needs. In turn, we believe SAP’s narrow moat, derived from its switching costs, is trending negative. However, it is still early in SAP's transition of on-premises users to the cloud, which leads us to believe its negative trend could be prolonged.

SAP’s first-quarter results indicated resilience especially within the most vulnerable of units in its transactional businesses (like Concur) holding up well. Results came in above FactSet consensus on the top line, prompting the stock to rise about 6% upon results. Altogether, we are maintaining our fair value estimate of EUR 119 per share, which places the stock in fairly valued territory. SAP shares are up around 30% year to date, which we attribute to the market better grasping the nuanced story SAP has to tell. On one end, SAP is a narrow-moat name that benefits from switching costs as a result of the difficulty in replacing ERP software that is necessary for day-to-day operations. Yet, on the other hand, we think switching costs are vulnerable for the time being as cloud migrations are difficult regardless of whether an enterprise sticks with the same software vendor or not, thus causing reflection on possible vendor changes. Hence, we believe that Workday will surpass SAP ERP market share by fiscal 2032.

SAP beat our fourth-quarter revenue expectations while missing our earnings estimates. We are lowering our fair value estimate to EUR 119 per share from EUR 131 after cutting our expectations for SAP’s terminal operating margins. Shares are down 1% to near EUR 105 per share, which still leaves ample upside for investors even with our fair value cut. We continue to believe increasing mix in cloud offerings will spark margin expansion in the long run but just to a lesser degree than we previously baked in. As a reminder, we think SAP’s narrow moat is undergoing a negative moat trend as the migration of workloads to the cloud is enabling enterprises to rethink their software vendor. However, we think the market is overestimating the degree to which SAP will be displaced, discounting what we believe to be SAP’s stickiest customers in the supply chain vertical.

SAP is a best-in-breed enterprise resource planning provider and holds dominant market share in global ERP software. However, SAP is phasing out its support of its on-premises ERP software such that by 2030 all of its ERP customers will need to shift to a cloud solution. We think that this vulnerability is a significant threat to SAP’s switching costs, as competitors like Workday offer compelling cloud ERP solutions, while forced migration opens up opportunity to question a company’s best fit for ERP needs. In turn, we believe SAP’s narrow moat, derived from its switching costs, is trending negative. However, it is still early in SAP's transition of on-premises users to the cloud, which leads us to believe its negative trend could be prolonged.

SAP reported mixed third-quarter results, coming in well above our top-line expectations (thanks to stellar cloud growth) while missing our earnings per share forecasts as its venture portfolio underwent significant value decreases. SAP reiterated its guidance for the full year except for free cash flow assumptions, which were lowered slightly. We are maintaining our fair value estimate for SAP at EUR 131 per share as we remain confident in our thesis that SAP will have tougher competition amid mass cloud migrations (meaning increased churn). Yet, for those who remain, we think customer stickiness will be restored and continued scale and mix toward cloud revenues will uplift margins further—driving our model. All in all, our thesis implies that market share losses don’t necessarily impute bleak prospects. Shares are up 6% upon results to near EUR 97 per shar share, though we believe SAP shares are still undervalued.

SAP is a best-in-breed enterprise resource planning provider and holds dominant market share in global ERP software. However, SAP is phasing out its support of its on-premises ERP software such that by 2030 all of its ERP customers will need to shift to a cloud solution. We think that this vulnerability is a significant threat to SAP’s switching costs, as competitors like Workday offer compelling cloud ERP solutions, while forced migration opens up opportunity to question a company’s best fit for ERP needs. In turn, we believe SAP’s narrow moat, derived from its switching costs, is trending negative. However, it is still early in SAP's transition of on-premises users to the cloud, which leads us to believe its negative trend could be prolonged.

SAP reported mixed second-quarter results missing FactSet consensus earnings per share despite a moderate revenue beat. Despite the EPS miss, we found it comforting that omitting the Russia exit, SAP would be outperforming against its operating profit goals. Revenue guidance for the year was reconfirmed but the range of non-IFRS operating profit for fiscal 2022 was reduced due to headwinds from exiting Russia. On the bright side, SAP's cloud business became the largest revenue contributor for the first time in the second quarter—as SAP added larger enterprises to its cloud software mix, compared with historically having a higher mix of net new midsize firms.

SAP is a best-in-breed enterprise resource planning provider and holds dominant market share in global ERP software. However, SAP is phasing out its support of its on-premises ERP software such that by 2030 all of its ERP customers will need to shift to a cloud solution. We think that this vulnerability is a significant threat to SAP’s switching costs, as competitors like Workday offer compelling cloud ERP solutions, while forced migration opens up opportunity to question a company’s best fit for ERP needs. In turn, we believe SAP’s narrow moat, derived from its switching costs, is trending negative. However, it is still early in SAP's transition of on-premises users to the cloud, which leads us to believe its negative trend could be prolonged.

SAP is a best-in-breed enterprise resource planning provider and holds dominant market share in global ERP software. However, SAP is phasing out its support of its on-premises ERP Central Component software such that by 2030 all of its ERP customers will need to shift to a cloud solution. We think that this vulnerability is a significant threat to SAP’s switching costs, as competitors like Workday offer compelling cloud ERP solutions, while forced migration opens up opportunity to question a company’s best fit for ERP needs. In turn, we believe SAP’s narrow moat, derived from its switching costs, is trending negative. However, it is still early in SAP's transition of on-premises users to the cloud, which leads us to believe its negative trend could be prolonged.

SAP reported mixed first-quarter results, as revenue nicely topped our expectations due to strength in cloud while earnings disappointed and fell below our forecast. Guidance for the year ahead remained the same. Considering even-keeled guidance and the mixed quarter, we are maintaining our fair value estimate of EUR 131 per share ($141 for U.S. ADR shares upon exchange rate changes) for this narrow-moat name. Prompted by the bottom-line miss, shares are down 2% upon results. Nonetheless, the earnings miss was largely due to a tough compare for SAP's noncore business, Sapphire Ventures. This makes the miss less concerning in our view, given it was less related to SAP's core business. Altogether, we think now is an attractive time to invest in SAP stock. While we rate SAP's narrow moat as having a negative moat trend due to vulnerable switching costs amid mass migrations of ERP systems to the cloud, we think that SAP will still be able to grow its top line on an absolute basis (despite falling ERP market share to come) while also seeing nice margin expansion from the existing client base remaining on SAP software after cloud migration. We do not think the market is properly factoring in this more nuanced take of this ERP legacy giant.

SAP is a best-in-breed enterprise resource planning provider and holds dominant market share in global ERP software. However, SAP is phasing out its support of its on-premises ERP software such that by 2030 all of its ERP customers will need to shift to a cloud solution. We think that this vulnerability is a significant threat to SAP’s switching costs, as competitors like Workday offer compelling cloud ERP solutions, while forced migration opens up opportunity to question a company’s best fit for ERP needs. In turn, we believe SAP’s narrow moat, derived from its switching costs, is trending negative. However, it is still early in SAP's transition of on-premises users to the cloud, which leads us to believe its negative trend could be prolonged.

After previewing fourth-quarter results on Jan. 14, SAP posted finalized earnings on Jan. 27 that helped provide a better picture of its end-of-year beat that had far surpassed FactSet consensus, while only mildly surpassing our own estimate. As we had expected, finalized results confirmed Sapphire Ventures' hefty contribution in the quarter. While this is discouraging, as the noncore group's success continues to contribute to poor quality earnings, making recent beats a bit misleading, SAP saw nice strength in its core business, as well. SAP's S/4HANA cloud revenue grew by a record-breaking 61% year over year, as the mass cloud migration is well underway. We are maintaining our EUR 131 fair value estimate for narrow-moat SAP, as we continue to believe SAP will benefit from overall health in the ERP market ahead, even while losing overall market share (due to vulnerability in legacy switching costs). Shares are down 6%, which we believe is a result of the market hoping for better near-term profitability. However, we remind investors that the cloud transition is messy, and short-term margin headwinds aren't indicative of long-term profitability. We think SAP is trading in fairly valued territory given our medium uncertainty rating.

SAP is a best-in-breed enterprise resource planning provider and holds dominant market share in global ERP software. However, SAP is phasing out its support of its on-premises ERP software such that by 2030 all of its ERP customers will need to shift to a cloud solution. We think that this vulnerability is a significant threat to SAP’s switching costs, as competitors like Workday offer compelling cloud ERP solutions, while forced migration opens up opportunity to question a company’s best fit for ERP needs. In turn, we believe SAP’s narrow moat, derived from its switching costs, is trending negative. However, it is still early in SAP's transition of on-premises users to the cloud, which leads us to believe its negative trend could be prolonged.

SAP announced preliminary fourth-quarter earnings that came in well beyond market FactSet consensus--with a more subtle beat compared with our expectations. The preview came along with mixed fiscal 2022 guidance--leading us to maintain our fair value estimates of EUR 131 ($152 for the U.S. ADR). This leaves narrow-moat SAP in fairly valued territory in our view. SAP will report fourth-quarter results in more detail on Jan. 27, at which time we are eager to hear profitability factors at play in the quarter in addition to detail on Sapphire Ventures' contribution in the quarter--as the noncore group has been the determining factor in several recent earnings beats for SAP. All in all, we continue to believe that SAP is undergoing a negative moat trend out of vulnerable switching costs in its software offerings amid the ongoing migration of enterprise workloads to the cloud--and we do not consider the significant beat compared with market expectations to be at odds with our thesis.