This site requires a more recent version of Adobe Flash Player to function properly.
Go here to get Flash.
Trefis's graphical modelling tools require Flash, but here's a preview of some of the content you'll see once
Flash is enabled:
Investment Overview for SAP (NYSE:SAP)
Below are key drivers of SAP's value that present opportunities for upside or downside to the current Trefis price estimate for SAP:
- SAP ERP Market Share: We estimate that SAP share in Enterprise Resource Planning (ERP) software market declined from around 26.8% in 2008 to around 23% in 2015. We expect it to remain almost stable over our forecast period, as the increased integration of HANA may be offset by heavy competition in the cloud segment. If SAP manages to capture 30% of the market by the end of the forecast period, there could be a 10% upside to its price estimate.
- SAP CRM Market Share: We estimate that SAP share in Customer Relationship Management (CRM) software has declined from around 22.5% in 2008 to 12% in 2015. Though SAP has been slow on the uptake in the cloud computing market, its cloud business has taken off in the last two years with strong double digit growth in revenues as well as bookings. This indicates that HANA's seamless integration with the cloud may have potential. However, SAP faces stiff competition from Salesforce.com, Oracle and Microsoft in this market. Pure cloud computing players like Salesforce.com have an advantage over SAP as they can focus the efforts of their sales teams exclusively on the lucrative cloud market. Also, Oracle has claimed that it is gaining applications market share from SAP and Salesforce in the cloud computing segment. We believe that the benefits from SAP HANA may not be sufficient to offset the rapid gains made by its competitors in the cloud computing market. Consequently, we expect SAP's market share to decline to 10% by the end of Trefis forecast period. However, if SAP manages to gain share in the CRM market and reaches 15% market share by the end of our review period, there could be a 10% upside to its price estimate.
For additional details, select a driver above or select a division from the interactive Trefis split for SAP at the top of the page.
SAP makes money by selling crucial software applications to businesses worldwide. Companies use SAP software to efficiently integrate and process data, better manage customer and supplier relationships, and shorten product lead time to market through use of product management software.
Each of these four steps, i.e. integrate and process data, manage customer relationships, manage supplier relationships, and shorten product lead time, can be thought of as corresponding to one of SAP's four main software offerings.
Enterprise Resource Planning Software (ERP):
SAP's best known product is its SAP Enterprise Resource Planning (SAP ERP) software. Enterprise Resource Planning (ERP) is software used for integrating the data and processes of an organization into one single system.
For example, in a bank, a credit card system and a savings account system are two different systems having no common interface. SAP ERP provides an interface which connects all systems together, in this example connecting credit card and savings account systems.
With the bank's system integrated using ERP software, the bank's customers will now be able to auto-debit their credit card payments to their savings account. Without this vital integration of the two systems, the customer would have to manually transfer funds from his savings account to his credit card account. Furthermore, by tracking such information, ERP software helps the bank cross sell credit cards to their savings account customers and vice-versa leading to new revenue opportunities.
Customer Relationship Management Software (CRM):
Customer Relationship Management (CRM) is software that allows companies to better manage customer information such as leads, transaction history and communication history. CRM data helps companies acquire and retain customers as well as gain marketing and customer insight.
For example, a customer may always buy the same product from a retailer. The retailer could advertise similar products to the customer if it kept track of the specific products purchased by the customer as well as the customer's spending habits and what products he may be interested in the future. Tracking and organizing such information creates significant business opportunities for the retailer. It is challenging to do such customer specific marketing without the help of the CRM software.
Supply Chain Management Software (SCM):
Supply Chain Management (SCM) is software that helps companies track the movement and storage of raw materials, work-in-process inventory, and finished goods from point of origin to point of consumption.
For example, a medical services company that sells medical and surgical supplies to hospitals would benefit from a supply chain management system that can coordinate with medical supply manufacturers and hospital customers. By keeping track of usage patterns, the supply chain management system will be able to forecast the demand of medical and surgical products by seasons, by regions and by customer types. This will help both the medical service company and hospitals to more efficiently manage their supply inventory levels.
Large retailers with many regional distribution centers like Wal-Mart use supply chain management systems to coordinate between suppliers of merchandise (e.g. clothes, paper products) and Wal-Mart's retail stores to reduce the inventory cost. This helps retailers like Wal-Mart pass savings onto customers in the form of lower prices for many everyday products. The backbone of many service operations is Supply Chain Management or SCM.
The ERP software segment is SAP's most valuable segment for the following reasons:
High Market Share in Large ERP Market
SAP remains the leader in the ERP market with a market share of more than 20%. We believe that SAP's ERP market share will remain nearly stable over our review period, since the impact of heavy competition is likely to be offset by SAP's success in the cloud segment. SAP also recently introduced S/4HANA, which offers much tighter integration with the cloud than its predecessor HANA, has the potential to turn around SAP's fortunes. Currently it is too soon to tell if S/4HANA will realize the potential that it holds, but a few more quarters should offer better clarity on its success or lack thereof.
High Gross Profit Margin
SAP benefits from high gross profit margins on all its software products to the tune of 80%.
Battle of faster technology continues
Time and again SAP has announced that its in-memory is a disruptive technology, which speeds up data storage and retrieval to unprecedented speeds. Leveraging the in-memory technology is a software known as HANA (High Performance Analytic Appliance). HANA uses a different method of storing and retrieving data by storing it on computer’s CPU rather than traditional way of reading and writing on storage disks.
On the other hand, Oracle has also made great strides over the last year or so through the introduction of faster Exadata machines capable of producing millions of transactions quickly.
SAP's future rests on the new SAP S/4HANA
In February 2015, SAP released the biggest update in over two decades to its ERP software. The latest update, SAP S/4HANA, redefines the way its ERP works by introducing in-memory simplifications that drastically improve speed and performance. Notably, while SAP HANA Business Suite runs on third-party databases, S/4HANA runs on HANA itself, an In-Memory technology where the entire data set is loaded and searchable in Random Access Memory. SAP claims the magnitude of improvement in transaction performance from this update may be as much as 3x to 7x; the data storage footprint of an ERP-system may improve by a factor of 10.
SAP S/4HANA is a major bet for the company, since it spent 2 years untold costs for development. However, even though SAP is relying on S/4HANA to turn around its fortunes in the cut-throat software industry, the company has hedged its bets by continuing full support and updates for the legacy SAP HANA for another decade.
SaaS is a subscription based service where companies can access software online and pay only for the functionality utilized. This is oftentimes a cost effective solution for companies, and suits small and medium enterprises more, as they have low IT budgets. In this model, the software is generally hosted on the service provider's servers from where it can be easily accessed by users. As such, businesses can save heavily on costs and time involved with purchase and implementation of expensive software. We forecast an increasing trend towards "Software as a Service" adoption.
SAP SaaS offering includes CRM, which it sells by the name CRM on-demand.
How Does Trefis Modelling Work?
How do we get the historical numbers for this chart?
Trefis has a team of in-house Analysts who gather historical data from company filings and other verifiable sources. When historicals are available, we explain how we got them at the bottom of the Trefis analysis section below.
Who came up with the Trefis forecast for future years?
The Trefis team of in-house Analysts considers a variety of factors when projecting any forecast. The rationale for our projections is explained in the Trefis analysis section below.
How does my dragging the trendline on the chart impact the stock price?
- We use forecasts for business drivers to calculate forecasted Revenues and Profits for each division of the company.
- We then use forecasted Profits in a Discounted Cash Flow (DCF) model to obtain the Price Estimate for the company.
See more on: DCF Methodology
View All Help Topics