Cloud Momentum Drives SAP’s Q1 FY24 Earnings
Software giant SAP reported solid Q1 FY24 earnings, meeting analysts’ expectations. Cloud revenue continued its strong growth trajectory, increasing 25% year-over-year to €3.9 billion. This growth was primarily driven by the SaaS/PaaS sub-segments, which comprise SAP’s Cloud ERP Suite.
SAP’s cloud pipeline also experienced impressive growth, indicating a solid demand for the company’s cloud offerings. The company’s backlog metrics showed a 27% year-over-year increase in cloud backlog volume, reaching €14.2 billion.
Business AI Transformation Progresses
SAP highlighted the acceleration of its pivot towards Business AI. The company is embedding GenAI into its cloud products and has plans to launch over 100 AI-focused features and products this year.
Regional Performance and Margin Pressures
SAP observed slower growth in its Americas region. However, the other geographical regions maintained strong growth rates.
As part of its restructuring program, the company incurred significant expenses, which weighed on operating profit margins. Despite improving gross margins, operating profits took a hit.
Valuation Concerns
While SAP’s fundamentals remain solid, the company’s valuation appears stretched. Based on estimated growth rates and a conservative PE multiple, the author believes SAP’s stock is fairly valued with limited upside potential.
Conclusion
SAP’s Q1 FY24 results indicate progress in its cloud and AI transformation. However, valuation concerns and the need to broaden customer adoption of its cloud products justify a neutral stance on the stock.
