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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 has declined from around 26.8% in 2008 to around 24% in 2014. 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 35% of the market by the end of the forecast period, there could be a 16% 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 2014. We expect that SAP will benefit from the excellent off-take of HANA and integration of the platform and SAP's applications.
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 it can benefit from the expected fast growth of cloud computing market. Also, Oracle has claimed that it is gaining applications market share from SAP. We believe that the benefits from SAP Hana will be offset by market share gains by its competitors. Consequently, we expect SAP's market share to decline to 8.7% by the end of Trefis forecast period.
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 around 24% in 2014. We believe that SAP's ERP market share will decline marginally by the end of the Trefis forecast period due to heavy competition and low barriers to entry in the cloud segment.
On the flipside, we believe SAP may lose market share in future due to
- Better innovative efforts taken by its competitors.
- Increasing presence of its competitors across the globe.
High Gross Profit Margin
SAP benefits from high gross profit margins on all its software products to the tune of 81%.
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) that SAP released a few months back. 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.
Software as a Service (SaaS)
Software as a Service (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
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