At $131 Does SAP’s Stock Have Upside?

At the current price of around $131 per share, we believe SAP’s stock (NYSE: SAP) has moderate growth potential in the near term. SAP stock has remained nearly flat since the end of 2019 compared to the S&P 500 which has increased by 21% in the same period. SAP saw revenue rise by 8.7% to $33.3 billion (flat in euro) for 2020. Net income improved due to operational efficiency as the earnings per share went up to $5.29 in 2020 from $3.11 in the previous year.  The company has seen earnings rise over the recent years, while its P/E multiple has fallen slightly. We believe the stock has moderate growth potential in the near term. Our dashboard ‘Buy or Sell SAP Stock?‘ provides the key numbers behind our thinking.

The 32% rise in SAP stock price from 2018 to now is justified by a significant rise in earnings during those years. SAP’s revenue rose from $28.3 billion in 2018 to $33.3 billion in 2020. Net Income margin increased from 16.5% in 2018 to 18.8% in 2020. On a per share basis, earnings went up from $3.92 to $5.29 helped by a 1% decrease in shares outstanding.

During the same period, the P/E multiple fell from 25.4x to 24.6x. The P/E improved slightly in 2021 and is currently at 24.8x.

Where Is The Stock Headed?

The global spread of coronavirus led to lockdown in various cities across the globe, which affected industrial and economic activity. This, in turn, adversely affected consumption and consumer spending. However, SAP’s revenues and earnings grew in 2020 primarily due to the Cloud segment which witnessed a 28% growth. Software Support segment revenue also grew by 9% for the year.

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. Following the Fed stimulus — which set a floor on fear — the market has been willing to “look through” the current weak period and take a longer-term view. With investors focusing their attention on 2021 results, the valuations become important in finding value. Though market sentiment can be fickle, and evidence of an uptick in new cases could spook investors once again. As per SAP’s valuation by Trefis, we have a price estimate of $147 per share for SAP’s stock, up by 12% from the current market price.

While SAP may have further upside, 2020 has created many pricing discontinuities which can offer attractive trading opportunities. For example, you’ll be surprised how counter-intuitive the stock valuation is for Amazon vs Etsy. Another example is Apple vs Microsoft.

See all Trefis Price Estimates and Download Trefis Data here

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