SAP SE‘S (JUICE – The stock (Free Report) continues its upward trend, gaining 50% over the past year, compared to S&P 500 Composite and sub-industry growth of 18.6% and 19.8%, respectively.
The company is one of the world’s largest independent software vendors and the leading provider of enterprise resource planning (ERP) software. SAP has an extensive partner ecosystem with over 20,000 partners worldwide in more than 140 countries.
SAP’s strong financial performance is supporting the share price development. The company has focused primarily on expanding its cloud business to become one of the leading providers in this category. In the last quarter, the current cloud backlog – an important indicator of market success in the cloud business – rose by 28% (both on a nominal and constant basis) to 14.8 billion euros.
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Booming cloud business
In the second quarter of 2024, SAP’s cloud revenues amounted to EUR 4.15 billion, up 25% year-on-year on a non-IFRS basis (nominal and cc). The uptrend resulted from a notable 33% growth in cloud ERP suite revenues, underscoring the effectiveness of SAP’s software-as-a-service (SaaS) and platform-as-a-service (PaaS) solutions. On a non-IFRS basis, cloud revenues related to SaaS and PaaS increased 28% cc to EUR 4.018 billion. Cloud revenues related to infrastructure-as-a-service decreased 27% cc to EUR 135 million.
The strength of SAP’s cloud business was particularly pronounced in India, Japan, South Korea, Germany, Brazil and Canada. This business strength also remained strong in the United States, Saudi Arabia and China.
The increasing demand for Rise with SAP solutions remains the biggest driver. This solution helps companies transform their business processes and operations to become more agile, digital and intelligent. SAP solutions continue to gain significant traction and will help the company expand its market share in the cloud ERP solutions space.
In the second quarter, the Rise with SAP solution was adopted by customers including Alpargatas, Auckland Council, Blue Diamond Growers, Border States, Copenhagen Airports, ExxonMobil, Navantia, PANDORA, Porsche Informatik, Powerlink Queensland, Prairie Farms Dairy, ProRail, Prysmian, Shiseido Company, Tokio Marine & Nichido Fire Insurance, VistaPrint, Warsaw City Hall and Xerox.
“Rise with SAP” will also help the company increase adoption of its SAP S/4HANA solution by offering its customers more options for implementation and support from certified partners.
The momentum of other cloud offerings such as “Grow with SAP” and “SAP Datasphere” as well as strategic acquisitions and collaborations bode well for the company’s cloud business.
Given the strong momentum in the cloud business, management expects cloud revenues in the range of EUR 17 to 17.3 billion for 2024, an increase of 24 to 27 percent at constant exchange rates compared to the previous year. Cloud and software revenues are expected to be between EUR 29 and 29.5 billion, an increase of 8 to 10 percent at constant exchange rates compared to the previous year.
SAP expects cloud revenues of more than EUR 21.5 billion and total sales of more than EUR 37.5 billion by 2025.
Opportunities in generative AI
SAP remains optimistic about the trend toward generative AI. In April 2024, SAP announced significant advances in AI for supply chain solutions, with the goal of redefining productivity and efficiency in the manufacturing industry. The company announced a collaboration with IBM and Amazon Web Services to advance GenAI capabilities and unlock potential business opportunities.
Management announced that it would focus on key strategic growth areas, especially Business AI, and position the company for growth in early 2024. SAP intensified its restructuring efforts and expected total costs of around 3 billion euros. This initiative is critical to align SAP’s workforce and resources with long-term business strategies.
A few headwinds
However, continued weakness in the software licensing and support business coupled with global macroeconomic weakness is a concern. Rising costs and strong competition are additional headwinds for this Zacks Rank #3 (Hold) stock.
Estimated audit activity
The Zacks Consensus Estimate for SAP’s revenues in 2024 and 2025 is $36.7 billion and $40.6 billion, respectively, representing growth of 8.8% and 10.6%, respectively, from the prior-year level.
The consensus estimate for earnings per share in 2024 is $4.75. The consensus estimate for earnings per share in 2025 represents an increase of 33.4% from the previous year to $6.33.
The Zacks Consensus Estimate for earnings per share (EPS) for 2024 and 2025 have increased 4.2% and 3.1%, respectively, over the past 60 days, reflecting analyst optimism.
Stocks to be considered
Some better valued stocks worth considering in the broader technology space are Dachsmeter (Body Mass Index – Free report), Manhattan Employees (MANH – Free report) and ANSYS (ANSS – Free report). Badger Meter and Manhattan Associates currently each have a Zacks Rank #1 (Strong Buy), while ANSYS has a Zacks Rank #2 (Buy). You can see You can find the complete list of today’s Zacks #1 Rank stocks here.
The Zacks Consensus Estimate for Badger Meters earnings per share for 2024 is $4.06, representing an increase of 4.4% over the past 30 days. BMI’s earnings have beaten the Zacks Consensus Estimate in each of the trailing four quarters, with the average surprise being 12.9%. The long-term earnings growth rate is 17.9%. Shares are up 12.9% over the past year.
The Zacks Consensus Estimate for ANSS’s earnings in 2024 is $9.72, representing an increase of 3.7% over the past 30 days. ANSS’s earnings beat the Zacks Consensus Estimate in three of the past four quarters, but missed it once, with the average surprise of 4.8%. Shares have gained 2.6% over the past year.
The Zacks Consensus Estimate for MANH’s earnings per share in 2024 is $4.26. MANH’s earnings have beaten the Zacks Consensus Estimate in each of the trailing four quarters, with the average surprise being 26.6%. The stock has gained 28.8% over the past year.
