With Enterprise Spending Slowing, Is SAP Stock Still A Good Buy?

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SAP (NYSE:SAP), a market leader in enterprise application software and also one of the biggest analytics and business intelligence companies, published a weaker-than-expected set of Q4 2022 results last week. SAP recorded revenue of 8.44 billion euros (about $9.15 billion), up by 6% year-over-year, driven by growth in the company’s cloud offerings, although this was partly offset by weaker software license sales. The company’s operating profit rose about 17% to 1.71 billion euros, driven by expanding gross margins for the cloud business. For 2023, the company has guided cloud and software revenue of between 28.2 and 28.7 billion euros ($30.55 to $31 billion) at constant currencies, which would translate into a growth of 6% to 8%. The company’s cloud business, which has been a key focus area for investors, fared well, with revenue rising by 30% year-over-year to 3.39 billion euros ($3.69 billion). Revenue visibility for the business is also improving, with its cloud backlog – which represents the contractually committed cloud revenue that the company expects to recognize over the upcoming 12 months – rising 27% compared to last year to 12 billion euros ($13 billion).

We remain marginally positive on SAP stock, with a price estimate of $124 per share, marking an upside of around 7% from the current market price. Although there are clearly headwinds for the enterprise software market, with global economic growth set to cool, SAP has a couple of things going in its favor. SAP is guiding that cloud sales will rise 22% to 25% in constant currency terms for the full year 2023. Although SAP is building its cloud business at the expense of a decline in software license sales, it still expects overall Cloud and software sales to grow by 6% to 8% for the full year, which is reasonable in the current environment. Moreover, SAP is looking to cut costs, with plans to reduce about 3,000 jobs or roughly 2.5% of its total headcount. This could result in annual cost savings of 300 million to 350 million euros starting as early as 2024. SAP’s cloud transition should give the company a larger mix of recurring sales, with the company already classifying about 79% of its sales as very predictable. As the cloud transition continues, investors could potentially value SAP more as a cloud software company. For perspective, SAP presently trades at about 19.5x consensus 2022 earnings, compared to cloud-only players such as Salesforce stock which trades at over 33x  forward earnings. 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 Jan 2023
MTD [1]
2023
YTD [1]
2017-23
Total [2]
 SAP Return 13% 13% 34%
 S&P 500 Return 5% 5% 80%
 Trefis Multi-Strategy Portfolio 9% 9% 243%

[1] Month-to-date and year-to-date as of 1/31/2023
[2] Cumulative total returns since the end of 2016

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