SAP SE’s stock (SAP) continues its impressive climb, having gained 36.7% year-to-date, outpacing both the S&P 500 composite (13.3%) and its sub-industry (6.2%). While recently trading at a slight discount (4.5%) to its 52-week high of $221.24, this pullback might present a strategic opportunity for investors seeking potential gains. With a solid Zacks Rank #2 (Buy) and a favorable VGM Score of B, SAP appears to be a solid investment option.
SAP’s cloud business is a key driver of its success. In the most recent quarter, the company’s current cloud backlog, a crucial indicator of cloud business performance, surged by 28% (both nominally and in constant currency) to €14.8 billion. This growth is fueled by the increasing demand for its Rise with SAP solution, which helps businesses transform their operations and become more agile, digital, and intelligent.
Rise with SAP’s popularity is also boosting the adoption of SAP S/4HANA, providing customers with more implementation and support options through certified partners. Other cloud offerings, such as Grow with SAP and SAP Datasphere, are also contributing to this momentum. Strategic acquisitions and collaborations further enhance SAP’s cloud capabilities.
This growth is evident in SAP’s cloud revenue, which reached €4.15 billion in the second quarter of 2024, marking a 25% year-over-year increase (non-IFRS). This impressive growth is fueled by the strong performance of its Cloud ERP Suite, which saw a notable 33% rise in revenue. SAP’s cloud dominance is expanding globally, with strong performances in regions like India, Japan, South Korea, Germany, Brazil, and Canada. The company also maintains a robust presence in the United States, Saudi Arabia, and China.
Building on its cloud strength, SAP anticipates 2024 cloud revenues to be in the range of €17-€17.3 billion, representing a year-over-year increase of 24-27%. Overall, cloud and software revenues are expected to reach €29 billion to €29.5 billion, reflecting an 8-10% growth. The company’s ambitious outlook extends further, with projections of exceeding €21.5 billion in cloud revenues and €37.5 billion in total revenues by 2025.
SAP is also keenly focused on the potential of generative AI. The company announced significant advancements in AI for supply chain solutions in April 2024, aiming to revolutionize productivity and efficiency in manufacturing. SAP’s collaborations with IBM and Amazon Web Services are further strengthening its GenAI capabilities and unlocking new business opportunities.
In 2024, SAP announced its commitment to strategic growth areas, particularly Business AI, positioning the company for continued growth. The company has initiated restructuring efforts, aiming to align its workforce and resources with its long-term strategy. This initiative is expected to incur total expenses of approximately €3 billion.
While SAP’s cloud business is thriving, it faces challenges. Softness in the software license and support business segment, coupled with global macroeconomic weakness, present concerns. The increasing costs and stiff competition in the cloud space are additional headwinds.
Despite these challenges, analysts remain optimistic about SAP’s future. The Zacks Consensus Estimate for SAP’s 2024 and 2025 revenues is pegged at $36.7 billion and $40.6 billion, respectively, representing growth of 8.8% and 10.6% from the previous year. The consensus estimate for 2024 EPS is $4.83, while the 2025 EPS is estimated at $6.33, implying a 31.2% rise from the prior year. In the past 60 days, analysts have increased their consensus estimates for 2024 and 2025 EPS by 5% and 3.3%, respectively, reflecting their positive outlook.
Investors looking for exposure to the broader technology sector should also consider other top-ranked stocks, such as Manhattan Associates (MANH), Adobe (ADBE), and ANSYS (ANSS). These companies boast strong fundamentals, positive analyst sentiment, and promising growth potential.
