Does SAP Have Any Upside?

by Trefis Team
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[Updated 11/18/2020] SAP Update

Having gained more than 13% since the March bottom, SAP’s stock (NYSE: SAP) is close to its near term potential. Our conclusion is based on a detailed comparison of SAP’s performance against the S&P 500 now as well as during the 2008 downturn in our interactive dashboard analysis, 2007-08 vs. 2020 Crisis Comparison: How Did SAP’s Stock Fare Compared With S&P 500? 

Due the Covid-19 crisis, SAP, one of the world’s largest enterprise software and services providers, has seen its revenues remain flat for the first nine months of the year compared to the same period in the previous year. In Q3 2020, SAP reported an earnings beat with EPS of €1.32 while total revenues were short of consensus at €6.5 billion, down 4% y-o-y. Further, the company reported €5.1 billion in cash inflows from operating activities for the first nine months.

We expect SAP’s revenues to remain flat at around € 27.4 billion for 2020. Further, its net income is likely to rise by 42% y-o-y primarily driven by a higher Net financial income, increasing the EPS figure to €3.95 for 2020. Thereafter, revenues are expected to touch €29.4 billion in 2021, mainly driven by recovery across segments after the pandemic subsides. Further, the EPS figure is likely to improve to €4.90, which coupled with the P/E multiple of just below 24.1x and a euro to dollar exchange rate of $1.11 will lead to SAP’s valuation around $131.


[Updated 07/30/2020] SAP’s Stock To Regain Pre-Corona Level?

We believe that SAP’s stock (NYSE:SAP) has limited upside potential once fears surrounding the coronavirus outbreak subside given its current price of around $128. Our conclusion is based on a detailed comparison of SAP’s performance against the S&P 500 now as well as during the 2008 downturn in our interactive dashboard analysis, 2007-08 vs. 2020 Crisis Comparison: How Did SAP’s Stock Fare Compared With S&P 500?

The World Health Organization (WHO) declared a global health emergency at the end of January in light of the coronavirus spread. The rally in the equity market continued till February 19, with the S&P 500 reaching a record high, but the trend reversed sharply over the following weeks. SAP’s stock lost 31% of its value (vs. about 34% decline in the S&P 500) between February 19 and March 23. A bulk of the decline came after March 6, when an increasing number of coronavirus cases outside China fueled concerns of a global economic slowdown. Notably, though, the multi-billion dollar stimulus package announced by the U.S. government has helped the stock price recover 28% over recent weeks (vs. about 35% gain in the S&P 500) to its current level of $128.


SAP’s Stock Fell Because The Situation On The Ground Has Changed

SAP’s stock has suffered as states and countries are on lockdown. As industries have halted production and services, the demand for software and web services have also taken a hit with consumers focusing solely on essentials and not discretionary products. We believe SAP’s Q2 results will confirm this reality with a drop in demand for products and services across its segments (Cloud, Software and Services), resulting in a drop in revenue growth. Our projections for SAP’s Revenues in 2020 and 2021 are available in a separate interactive dashboard.


But SAP’s Stock Fared Worse During The 2008 Downturn

We see SAP’s stock declined from levels of around $51 in October 2007 (the pre-crisis peak) to below $28 in March 2009 (as the markets bottomed out) – implying that the stock lost as much as 46% of its value from its approximate pre-crisis peak. This marked a lower drop than the broader S&P, which fell by about 51%.

Moreover, SAP recovered strongly post the 2008 crisis to about $41 in early 2010 – rising by 48% between March 2009 and January 2010. In comparison, the S&P also bounced back by about 48% over the same period. 

Will SAP’s Stock Recover Similarly From The Current Crisis?

SAP’s stock fell 31% from the market peak on February 19 to the low on March 23 compared to the 46% decline during the 2008 recession. We believe it can potentially recover to levels of $138-140 or more once economic conditions begin to show signs of improvement. This marks a full recovery to the $139 level SAP’s stock was at before the coronavirus outbreak gained global momentum. 

The actual recovery and its timing hinge on the broader containment of the coronavirus spread. Our dashboard Trends In U.S. Covid-19 Cases provides an overview of how the pandemic has been spreading in the U.S. and contrasts with trends in Brazil and Russia. With investors focusing their attention on 2021 results, the valuations become important in finding value.

What if you’re looking for a more balanced portfolio instead? Here’s a high quality portfolio to beat the market, with over 100% return since 2016, versus 55% for the S&P 500. Comprised of companies with strong revenue growth, healthy profits, lots of cash, and low risk, it has outperformed the broader market year after year, consistently.

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