Headquarter of SAP AG in Walldorf, Germany. (Photo by plus49/Construction Photography/Avalon/Getty … [+]
SAP, a market leader in enterprise application software and also one of the biggest analytics and business intelligence companies, has seen its stock decline by around 21% year-to-date, underperforming the broader Nasdaq-100, which remains down by about 10% thus far in 2022. The sell-off is driven by a couple of factors. Although SAP posted a stronger than expected set of Q4 2021 results with both revenue and earnings beating consensus, it forecast a decline in operating profits as well as weaker free cash flow for 2022 due to an ongoing overhaul of delivery infrastructure, as it transitions remaining customers who are still on legacy infrastructures to a cloud infrastructure. Separately, there has been a broader sell-off in cloud and software stocks, in anticipation of higher interest rates and tighter monetary policy and this has also hurt SAP.
That being said, we think that SAP stock is a pretty good value at the current market price of about $111 per share. SAP’s transition to the cloud is happening quickly, with cloud revenue rising by about 24% year-over-year in constant currency terms to about 2.61 billion euros ($2.86 billion) in Q4 2021, with the company projecting between 23% and 26% growth for 2022. Now although the pivot to the cloud is likely impacting revenue growth, as upfront license sales are substituted with subscriptions, there are multiple long-term benefits of the transition for SAP. For one, it makes revenues more predictable with a larger mix of recurring sales. The company now classifies about 78% of its sales as highly predictable. Moreover, SAP is also betting that the transition can 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 like a cloud software company. For perspective, at its current market price of about $111 per share, SAP trades at just about 19x consensus 2022 earnings, compared to cloud-only players such as Salesforce and ServiceNow, which trade at about 45x and 70x forward earnings, respectively.
We value SAP at about $142 per share, marking an upside of around 30% 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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