SAPGF - SAP: Fantastic Transformation But Markets Are Getting Ahead Of Themselves (Rating Downgrade)
2024-01-29 07:30:00 ET
Summary
- SAP’s growth has improved well, primarily due to the development of a compelling Cloud offering which is growing at ~20-25% YoY. This said, its other segments are dragging the company.
- Although margin improvement has been delivered, SAP remains below what it has achieved historically. With increased competition, it will face difficulty generating further gains.
- Management is seeking to integrate AI capabilities into its services. We are not convinced this will materially improve its value proposition relative to its peers who are equally investing.
- We believe investors have likely moved from overly bearish to overly bullish since Sep22 (share price up ~100%), given management’s ability to impressively outperform.
- SAP is trading at a valuation implying good growth and some margin improvement, despite stagnation in its non-Cloud offering and the eventual maturity of its Cloud segment.
Investment thesis
Our current investment thesis is:
- Management has performed exceptionally well to revitalize SAP. Its cloud platform is clearly incredibly compelling, winning market share and considerable growth. We expect this trajectory to remain in the near-term, although with strong competition, the business will inevitably face a slowdown (at which point it can transition to margin improvement).
- Investors appear to not appreciate that SAP’s top-line growth is still underwhelming (FY23 is up a mighty +1% vs. FY22). Its other segments are continuing to stagnate and with Cloud representing 44% of revenue, it cannot single-handedly move the needle attractively.
- We believe the talk of AI is overblown relative to what it can deliver. SAP is spending ~€2b for this next transformational phase. By contrast, its market cap has grown ~€43b since Sep23.