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SAP Surges 15% in the Past Six Months: What Lies Ahead for the Stock?
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SAP SE’s (SAP - Free Report) shares have been performing well on the trading front, with a gain of 14.9% in the past six months.
The stock has outperformed its sub-industry, Zacks Computer and Technology sector and the S&P 500 composite’s growth of 1%, 10.5% and 9.6%, respectively. SAP stock’s good run on the trading front can be attributed to the sustained momentum in the cloud business, which is aiding the top-line performance.
Image Source: Zacks Investment Research
SAP stock closed the last trading session at $220.47, near its 52-week high of $231.13. The stock is also trading above its 100-day and 200-day moving averages.
Image Source: Zacks Investment Research
Investors are now most likely contemplating whether to stay invested or cash out. Let’s dive into SAP’s prospects and determine the best course of action for your portfolio.
Will the Cloud Business Continue to Thrive?
SAP has been focusing on expanding its cloud business to gain a higher share of the lucrative cloud market. Higher adoption of Rise with SAP solution remains the biggest driver. This solution helps companies transform their business processes and operations to become more nimble, digital and intelligent. This SAP solution continues to gain significant traction and will aid the company in driving its market share in the cloud ERP solutions space. Rise with SAP will also help the company boost the uptake of its SAP S/4HANA solution by providing its customers with more options for implementation and support from certified partners.
Momentum in other cloud offerings like Grow with SAP and SAP Datasphere, as well as strategic acquisitions and collaborations, bodes well for its cloud business. SAP’s cloud business strength was prominent across India, Japan, South Korea, Germany, Brazil and Canada. This business strength also remained strong in the United States, Saudi Arabia and China.
In the last reported quarter, the current cloud backlog — a key indicator of go-to-market success in cloud business — soared 28% (both at nominal and cc basis) to €14.8 billion. SAP’s cloud revenues were €4.15 billion, up 25% year over year on a non-IFRS basis (nominal and cc ). The uptick resulted from notable 33% growth in Cloud ERP Suite revenues, highlighting the effectiveness of SAP’s Software-as-a-Service (SaaS) and Platform-as-a-Service (PaaS) solutions. On a non-IFRS basis, cloud revenues related to SaaS and PaaS increased 28% at cc to €4.018 billion. Cloud revenues related to Infrastructure-as-a-Service declined 27% at cc to €135 million.
Given the strong momentum in the cloud business, management anticipates 2024 cloud revenues in the range of €17-€17.3 billion, which indicates an increase of 24-27% at cc on a year-over-year basis. Cloud and software revenues are expected to be between €29 billion and €29.5 billion, which implies 8-10% growth at cc on a year-over-year basis. SAP expects cloud revenues of more than €21.5 billion and total revenues of more than €37.5 billion for 2025.
Image Source: Zacks Investment Research
Generative AI: Another Big Revenue Opportunity for SAP
SAP remains optimistic about the generative AI trend. In April 2024, SAP announced significant advancements in AI for supply chain solutions, aiming to redefine productivity and efficiency in manufacturing sectors. The company announced a collaboration with IBM and Amazon Web Services to make strides in GenAI capabilities and unlock potential business opportunities.
Management announced that it would focus on vital strategic growth areas, especially Business AI and position the company for growth, earlier in 2024. SAP intensified its restructuring efforts, expecting total expenses of roughly €3 billion. This initiative is crucial for aligning SAP’s workforce and resources with long-term business strategies.
Weakness in Software License Business
Declining software license and support revenues owing to a shift to the cloud remain concerns. In the second quarter of 2024, Software licenses and support revenues totaled €3.021 billion, which decreased 5% (both at nominal and cc basis) year over year. Software license revenues of €0.2 billion declined 28% (down 27% at cc).
Macro Environment & Rising Costs: Additional Concerns for SAP
A volatile macroeconomic backdrop, along with increasing costs and stiff competition in the cloud space, is an additional headwind.
SAP’s Estimate Revision Activity
In the past 60 days, analysts have decreased their earnings estimates for the current quarter and year by 1.5% and 1%, respectively. The earnings estimate for the next quarter is revised upward by 1.4%, but the same for the next year has been revised downward by 0.6%.
Image Source: Zacks Investment Research
SAP’s Expensive Valuation
SAP stock is trading at a premium with a forward 12-month Price/earnings ratio of 36.72X compared with the industry’s 31.51X.
Image Source: Zacks Investment Research
How to Play SAP Stock?
SAP carries a Zacks Rank #3 (Hold) at present.
A cautious approach is needed while dealing with SAP. The stock has a solid growth opportunity driven by demand for its solutions in the cloud space. Generative AI is emerging as another revenue driver.
However, expensive valuation along with external risks warrant caution. It might not be a judicious investment decision to bet on the stock at the moment but long-term investors already owning the stock can stay put.
The Zacks Consensus Estimate for STX’s fiscal 2025 EPS is pegged at $7.41, unchanged in the past 30 days. STX’s earnings beat the Zacks Consensus Estimate in three of the trailing four quarters while missing in the remaining quarter, with the average surprise being 80.9%. The stock has surged 63.3% in the past year.
The Zacks Consensus Estimate for NTAP’s fiscal 2025 earnings is pegged at $7.08, unchanged in the past seven days. NTAP’s earnings beat the Zacks Consensus Estimate in each of the trailing four quarters, with the average surprise being 8.6%. Its shares have gained 62.5% in the past year.
The Zacks Consensus Estimate for BlackBerry’s fiscal 2025 EPS is pegged at a loss of 2 cents, improved from a loss of 5 cents in the past seven days. BB’s earnings beat the Zacks Consensus Estimate in each of the trailing four quarters, with the average surprise being 131.3%. Its shares have declined 38.8% in the past year.
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SAP Surges 15% in the Past Six Months: What Lies Ahead for the Stock?
SAP SE’s (SAP - Free Report) shares have been performing well on the trading front, with a gain of 14.9% in the past six months.
The stock has outperformed its sub-industry, Zacks Computer and Technology sector and the S&P 500 composite’s growth of 1%, 10.5% and 9.6%, respectively. SAP stock’s good run on the trading front can be attributed to the sustained momentum in the cloud business, which is aiding the top-line performance.
Image Source: Zacks Investment Research
SAP stock closed the last trading session at $220.47, near its 52-week high of $231.13. The stock is also trading above its 100-day and 200-day moving averages.
Image Source: Zacks Investment Research
Investors are now most likely contemplating whether to stay invested or cash out. Let’s dive into SAP’s prospects and determine the best course of action for your portfolio.
Will the Cloud Business Continue to Thrive?
SAP has been focusing on expanding its cloud business to gain a higher share of the lucrative cloud market. Higher adoption of Rise with SAP solution remains the biggest driver. This solution helps companies transform their business processes and operations to become more nimble, digital and intelligent. This SAP solution continues to gain significant traction and will aid the company in driving its market share in the cloud ERP solutions space. Rise with SAP will also help the company boost the uptake of its SAP S/4HANA solution by providing its customers with more options for implementation and support from certified partners.
Momentum in other cloud offerings like Grow with SAP and SAP Datasphere, as well as strategic acquisitions and collaborations, bodes well for its cloud business. SAP’s cloud business strength was prominent across India, Japan, South Korea, Germany, Brazil and Canada. This business strength also remained strong in the United States, Saudi Arabia and China.
In the last reported quarter, the current cloud backlog — a key indicator of go-to-market success in cloud business — soared 28% (both at nominal and cc basis) to €14.8 billion. SAP’s cloud revenues were €4.15 billion, up 25% year over year on a non-IFRS basis (nominal and cc ). The uptick resulted from notable 33% growth in Cloud ERP Suite revenues, highlighting the effectiveness of SAP’s Software-as-a-Service (SaaS) and Platform-as-a-Service (PaaS) solutions. On a non-IFRS basis, cloud revenues related to SaaS and PaaS increased 28% at cc to €4.018 billion. Cloud revenues related to Infrastructure-as-a-Service declined 27% at cc to €135 million.
Given the strong momentum in the cloud business, management anticipates 2024 cloud revenues in the range of €17-€17.3 billion, which indicates an increase of 24-27% at cc on a year-over-year basis. Cloud and software revenues are expected to be between €29 billion and €29.5 billion, which implies 8-10% growth at cc on a year-over-year basis. SAP expects cloud revenues of more than €21.5 billion and total revenues of more than €37.5 billion for 2025.
Image Source: Zacks Investment Research
Generative AI: Another Big Revenue Opportunity for SAP
SAP remains optimistic about the generative AI trend. In April 2024, SAP announced significant advancements in AI for supply chain solutions, aiming to redefine productivity and efficiency in manufacturing sectors. The company announced a collaboration with IBM and Amazon Web Services to make strides in GenAI capabilities and unlock potential business opportunities.
Management announced that it would focus on vital strategic growth areas, especially Business AI and position the company for growth, earlier in 2024. SAP intensified its restructuring efforts, expecting total expenses of roughly €3 billion. This initiative is crucial for aligning SAP’s workforce and resources with long-term business strategies.
Weakness in Software License Business
Declining software license and support revenues owing to a shift to the cloud remain concerns. In the second quarter of 2024, Software licenses and support revenues totaled €3.021 billion, which decreased 5% (both at nominal and cc basis) year over year. Software license revenues of €0.2 billion declined 28% (down 27% at cc).
Macro Environment & Rising Costs: Additional Concerns for SAP
A volatile macroeconomic backdrop, along with increasing costs and stiff competition in the cloud space, is an additional headwind.
SAP’s Estimate Revision Activity
In the past 60 days, analysts have decreased their earnings estimates for the current quarter and year by 1.5% and 1%, respectively. The earnings estimate for the next quarter is revised upward by 1.4%, but the same for the next year has been revised downward by 0.6%.
Image Source: Zacks Investment Research
SAP’s Expensive Valuation
SAP stock is trading at a premium with a forward 12-month Price/earnings ratio of 36.72X compared with the industry’s 31.51X.
Image Source: Zacks Investment Research
How to Play SAP Stock?
SAP carries a Zacks Rank #3 (Hold) at present.
A cautious approach is needed while dealing with SAP. The stock has a solid growth opportunity driven by demand for its solutions in the cloud space. Generative AI is emerging as another revenue driver.
However, expensive valuation along with external risks warrant caution. It might not be a judicious investment decision to bet on the stock at the moment but long-term investors already owning the stock can stay put.
Stocks to Consider
Some better-ranked stocks worth consideration in the broader technology space are Seagate Technology Holdings plc (STX - Free Report) , NetApp (NTAP - Free Report) and BlackBerry (BB - Free Report) . All stocks sport a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
The Zacks Consensus Estimate for STX’s fiscal 2025 EPS is pegged at $7.41, unchanged in the past 30 days. STX’s earnings beat the Zacks Consensus Estimate in three of the trailing four quarters while missing in the remaining quarter, with the average surprise being 80.9%. The stock has surged 63.3% in the past year.
The Zacks Consensus Estimate for NTAP’s fiscal 2025 earnings is pegged at $7.08, unchanged in the past seven days. NTAP’s earnings beat the Zacks Consensus Estimate in each of the trailing four quarters, with the average surprise being 8.6%. Its shares have gained 62.5% in the past year.
The Zacks Consensus Estimate for BlackBerry’s fiscal 2025 EPS is pegged at a loss of 2 cents, improved from a loss of 5 cents in the past seven days. BB’s earnings beat the Zacks Consensus Estimate in each of the trailing four quarters, with the average surprise being 131.3%. Its shares have declined 38.8% in the past year.