Why Has SAP’s Stock Gained 50% Since 2014?

SAP’s (NYSE: SAP) shares have gained 52% since 2014 – well above gains of 22% for the S&P 500, but notably below the 67% jump for the S&P500 IT Sector. Trefis captures Key Factors Driving Changes In SAP’s Stock over recent years in an interactive dashboard highlights the changes in key metrics over recent quarters and captures our forecasts and estimates for the company. You can modify any of the key drivers to visualize the impact of changes on its valuation. Additionally, you can see more Trefis technology company data here.

The total change in SAP’s stock price over the last four years can be broken down into 4 underlying components: the change in revenue, net income margin, exchange rate and P/E multiple. Notably, SAP’s shares have gained primarily from an increase in Revenues and P/E multiple, although gains have been mitigated to a large extent by a sharp reduction in Net Income Margin as well as from unfavorable foreign exchange movements over this period. The P/E multiple in itself has benefited from strong revenue growth (especially in the company’s cloud business). Also as the company’s costs have grown at a faster rate than revenues, there remains a potential opportunity to increase margins in the near future should the company decide to tighten its belt – leading to an optimistic P/E multiple compared to the figure several years ago.

A Quick Look At SAP’s Revenue Sources

SAP makes money selling enterprise software and related support services. The company reports its revenues in three segments ($28.3 billion in 2018):

• Cloud subscriptions and support ($5.7 billion in 2018, 20% of total revenue): Revenue is derived from subscription SAP’s software, cloud platform, hosting management services and support for subscription customers.
• Software licence ($5.3 billion in 2018, 19% of total revenue): Revenue is derived from the sale of on-premise software.
• Software support ($12.6 billion in 2018, 44% of total revenue): Revenue is derived from the sale of support services provided for on-premise software.
• Services ($4.7 billion in 2018, 17% of total revenue): Revenue is derived from the sale of consulting, training and other support services.

Summarizing Fiscal Q1 & Q2 Performance, And Highlighting Our Expectations For 2019:

• Total revenue reached EUR 24.71 bil in 2018 from EUR 22.06 bil in 2016. The change of EUR 2.65 bil between 2016-2018 implied an annualized growth rate of 62.6%. We expect 2019 revenue to reach EUR 26.95 bil (9.1% y-o-y), with changes being drive by individual divisions as follows:
  • Cloud Subscriptions and Support revenue reached EUR 4.99 bil in 2018 from EUR 2.99 bil in 2016. The change of EUR 2 bil between 2016-2018 implied an annualized growth rate of 41.4%. We expect 2019 revenue to reach EUR 6.6 bil (32.1% y-o-y).
  • Software Licenses revenue reached EUR 4.65 bil in 2018 from EUR 4.86 bil in 2016. We expect 2019 revenue to reach EUR 4.8 bil (3.2% y-o-y).
  • Software Support revenue reached EUR 10.98 bil in 2018 from EUR 10.57 bil in 2016. The change of EUR 0.41 bil between 2016-2018 implied an annualized rate of decline of-36%. We expect 2019 revenue to reach EUR 11.34 bil (3.2% y-o-y).
  • Services revenue reached EUR 4.09 bil in 2018 from EUR 3.64 bil in 2016. The change of EUR 0.45 bil between 2016-2018 implied an annualized rate of decline of-33.1%. We expect 2019 revenue to reach EUR 4.22 bil (3.2% y-o-y).
• Per Trefis estimates, the EPS for the full-year 2019 is likely to be $5.14. Taken together with a P/E of 24x, we expect a fair value for SAP’s shares to be $125.