SAP ( NYSE: SAP ) shares rose on Wednesday, even as investment firm Barclays Capital downgraded the German software company, noting the investment case has become "challenging."
Analyst Raimo Lenschow lowered the rating on SAP ( SAP ) to equal weight from overweight, pointing out that Russian headwinds, risk to profit guidance, lack of clarity on the new CFO and cost overruns associated with cloud infrastructure make it hard to be constructive on the stock.
"Unfortunately, the SAP investment case remains challenging with, as we see it, four key issues to navigate over the coming quarters," Lenschow wrote in a note to clients. "Of these, of likely most near-term concern are the magnitude of cost weighting to [second-quarter] and the reliance on a [fourth-quarter] disposal to hit even the low end of the adj. operating profit guide."
SAP ( SAP ) shares rose more than 1.5% to $90.52 in premarket trading.
Concerning Russia, Lenschow said any impact to second-quarter profit is not "new news," as management has been explicit that up to €350m of costs associated to Russia will hit this quarter. However, it's not exactly clear where the cost impact lies in terms of being consensus and foreign exchange has become "significantly more favorable" since SAP ( SAP ) reported first-quarter results.
Lenschow also pointed out that the up to €350m of costs associated to Russia could wind up impacting SAP's ( SAP ) full-year profit guidance if an "M&A disposal" is not made by the fourth-quarter, as management has previously indicated.
There are also concerns about Chief Financial Officer Luka Mucic's planned leave from the company, which hurts the investment case until a successor is named, Lenschow explained.
Lastly, concerns about cloud infrastructure cost overruns have been an issue since SAP ( SAP ) announced a “mid triple-digit” investment for two years in October 2020 to migrate customers away from legacy cloud infrastructure.
In May, investment firm RBC speculated that SAP ( SAP ), along with some other cloud giants, could be looking at several acquisitions in the space, as earnings multiples have come down .
Analysts have been positive on SAP ( SAP ). It had an average rating of BUY from Wall Street analysts , while Seeking Alpha authors are more positive on it and rate it a stronger BUY . Conversely, Seeking Alpha's quant system, which consistently beats the market, rates SAP a HOLD .
For further details see:
SAP rises even as Barclays downgrades, citing 'challenging' investment case