SAP’s Q1 Results Were Mixed, But The Stock Still Looks Like A Buy

SAP: SAP logo

SAP (NYSE:SAP), a market leader in enterprise application software and also one of the biggest analytics and business intelligence companies, posted a mixed set of Q1 2022 results, although the all-important cloud business continues to clock robust growth.

SAP’s cloud revenue for Q1 rose by about 25% year-over-year in constant currency terms to about 2.82 billion euros (about $3 billion), with growth rates also picking up slightly versus Q4 2021. SAP also says that its current cloud backlog stood at 9.73 billion euros ($10.5 billion), up 23% year-over-year in constant currency. For the full year, SAP is guiding that cloud sales will rise 23% to 26% at constant currency terms. Overall sales growth was also robust, with total revenue for the quarter rising about 11% year-over-year (7% in constant currency) to 7.08 billion euros ($7.6 billion), beating estimates. This marks an increase from the roughly 3% growth rates SAP was recording last year. We believe the overall pickup in revenue growth is encouraging, as the cloud transition typically results in a growth rate hit, as upfront software license sales are substituted with subscription revenue and it’s possible that SAP could be moving beyond these transitory issues. However, adjusted earnings per share fell short of estimates, declining by about 28% to 1 euro on account of higher R&D and marketing spending, costs related to the Russian business, and lower financial income versus last year from the company’s investments in venture capital firm Sapphire Ventures. The company also guided for a roughly 350 million euro hit to its 2022 adjusted profit, as it now plans to exit the Russian market entirely, following the invasion of Ukraine.

That being said, we think that SAP stock is a pretty good value at the current market price of about $105 per share. SAP’s cloud transition should give the company a larger mix of recurring sales, with the company now classifying about 81% of its sales as highly predictable. Moreover, SAP is also betting that the transition should help it increase its wallet share with customers, as the cloud-based model effectively bundles the software with the back-end IT infrastructure and operational services, which businesses typically had to maintain with the on-premise models.  Moreover, as the cloud transition continues, investors could value SAP more as a cloud software company. For perspective, SAP trades at just about 19x consensus 2022 earnings, compared to cloud-only players such as Salesforce stock and ServiceNow stock, which trade at about 40x and 65x forward earnings, respectively.

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We value SAP at about $147 per share, marking an upside of around 40% from the current market price. See our analysis of SAP Valuation: Is SAP Stock Expensive Or Cheap? for more details. For more information on SAP’s business model, key revenue streams, and how its revenues have been trending, check out our analysis on SAP Revenue: How Does SAP Make Money.

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 Returns Apr 2022
MTD [1]
YTD [1]
Total [2]
 SAP Return -6% -26% 20%
 S&P 500 Return -3% -8% 96%
 Trefis Multi-Strategy Portfolio -7% -14% 239%

[1] Month-to-date and year-to-date as of 4/25/2022
[2] Cumulative total returns since the end of 2016

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