Flush With Cash Following Qualtrics Deal, Is SAP Stock A Buy?

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SAP: SAP logo
SAP
SAP

SAP (NYSE:SAP), a market leader in enterprise application software and also one of the biggest analytics and business intelligence companies, has seen its stock rally by over 20% this year. While tech stocks in general have fared well this year amid cooling inflation and slower rate hikes by the U.S. Federal Reserve, SAP has seen a couple of other tailwinds as well. Firstly, the company divested its majority stake in a customer experience management company, Qualtrics, in a deal that brings in about $7.7 billion in cash. The deal and valuation are being viewed favorably by analysts and should make the company a net cash-positive company. Moreover, SAP’s financial performance has also been reasonably strong, with revenue growing by a stronger-than-expected 10% in Q1 2023. The company’s cloud business, which has been a key focus area for investors, saw sales rise by 24% year-over-year although this metric fell slightly short of estimates. 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 25% compared to last year to 11.1 billion euros ($12.14 billion). That said, SAP did lower its sales forecasts for the cloud business, with sales now seen at between Euro 14.0 billion and Euro 14.4 billion, down Euro 1.3 billion versus its earlier guidance due to the divestment of Qualtrics.

We remain somewhat neutral on SAP stock at current levels, with a price estimate of $129 per share, which is roughly in line with the current market price. 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 Euro 300 million to Euro 350 million 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 82% of its sales as very predictable, up from about 79% in the previous quarter. SAP also expected overall software and cloud revenue to rise by as much as 8% this year. That said, there are issues as well. There are clearly headwinds for the enterprise software market, with global economic growth set to cool and this could impact companies such as SAP. Moreover, SAP presently trades at about 22x consensus 2023 earnings. This is not exactly cheap compared to faster-growing cloud-only player Salesforce stock which trades at over 28x 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 May 2023
MTD [1]
2023
YTD [1]
2017-23
Total [2]
 SAP Return -3% 28% 52%
 S&P 500 Return -1% 7% 84%
 Trefis Multi-Strategy Portfolio -2% 6% 234%
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[1] Month-to-date and year-to-date as of 5/14/2023
[2] Cumulative total returns since the end of 2016

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