SAP (NYSE:SAP), a market leader in enterprise application software and also one of the biggest analytics and business intelligence companies, posted a relatively mixed set of Q2 2022 results, with revenue beating estimates driven by strong growth of the closely-watched cloud business, although its decision to exit Russia weighed on its earnings.
SAP’s revenues came in at 7.517 billion euros ($7.64 billion), with growth standing at about 13% year-over-year. SAP’s cloud revenue for Q2 rose by about 34% year-over-year to about 3.06 billion euros (about $3.11 billion) and the outlook also remains robust, with its current cloud backlog rising 34% compared to last year to 10.403 billion euros ($10.57 billion). For the full year, SAP is guiding that cloud sales will rise 23% to 26% in constant currency terms. Moreover, unlike most U.S. multinationals, who have been weighed down by the strengthening dollar this earnings season, the weakening of the euro versus the dollar has actually proved a major tailwind for SAP, as its growth would have been about 800 basis points lower at about 5% in constant currency terms.
However, SAP’s operating profit declined 32% versus last year to €673 million ($684 million), due to a growing mix of cloud revenue compared to licensing, as well as significant bad debt expenses related to the Russia – Ukraine war. The company also revised its full-year operating profit outlook to a range of €7.6 billion to €7.9 billion ($7.73 billion to $8.03 billion) down from a previous forecast range of €7.8 billion to €8.25 billion ($7.93 billion to $8.39 billion).
Overall, we think that SAP stock is a good value at the current market price of about $90 per share. SAP’s cloud transition should give the company a larger mix of recurring sales, with the company already classifying about 80% 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 potentially value SAP more as a cloud software company. For perspective, SAP trades at just about 17.5x consensus 2022 earnings, compared to cloud-only players such as Salesforce stock which trades at about 38x forward earnings. We value SAP at about $148 per share, marking an upside of around 60% 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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