SAP stock: Why shareholders should be patient with SAP

by Florian Hielscher, Euro on Sunday

AWhen the software group recently presented its preliminary figures for the fourth quarter of 2021, one person in particular should have been satisfied: Christian Klein. The CEO is pursuing a risky, but probably no alternative strategy: by 2025, SAP should achieve at least 22 billion euros in sales in the cloud. Klein appears to be on track, with growth accelerating to 28 percent in the fourth quarter. There were almost ten billion euros in cloud sales for the year as a whole.

The largest software company in Europe is in the middle of a transformation. Corporate customers used to buy one-time licenses from the Walldorf company. Today they rent applications including service and server capacity. The subscription to the service from the cloud offers more flexibility and security. Providers thus generate regular and easily plannable sales. The cloud business helps competitors such as Oracle or Salesforce, who are stronger in the cloud, to achieve high valuations on the stock exchange. With the expected price-earnings ratio for 2022, the US competitor Salesforce is granted a multiple of more than twice as high as SAP.

High investments in products and marketing are necessary for the conversion. In addition, cloud products are initially less profitable than license sales. This was evident in Klein’s first year in office. In October 2020, SAP shocked investors and lost around 20 percent of the market value in one fell swoop.

customers ask

Nevertheless, Klein, who has been the sole boss since 2020, wants to rely even more on the cloud. After all, customers also want to be in the cloud. “More and more companies are turning to SAP to help them transform, build resilient supply chains, and become sustainable businesses as they move to the cloud.”

Klein wants to resolutely continue his strategy. For 2022, SAP expects cloud revenue to increase by 23 to 26 percent at constant currency to between 11.6 and 11.9 billion euros. According to preliminary figures, growth in 2021 was 16 percent. Total sales increased by just 2 percent. In the license business, which was once profitable, revenues fell by eleven percent.

Break in profit increase

Because of the necessary investments, Klein had lowered expectations for 2021 and 2022. Because in order to take advantage of growth opportunities, he accepts cuts in the operating result. In 2021, operating profit fell by one percent. Klein expects a similar result for 2022. At the lower end of the forecast range, there would even be a slight decline. That could get tricky for shareholders. Analyst Knut Woller from Baader Bank sees the risk of a negative market reaction.

But there is no alternative. The cloud already accounts for around a third of sales. If SAP reaches 22 billion euros in cloud volume in 2025, this will correspond to around 60 percent of the sales expected by analysts – a doubling. It would be a milestone towards a revaluation by the stock market. The Walldorf-based company uses the favorable price level to buy back its own shares with a volume of up to one billion euros from February until the end of the year.

foresight: The expansion of the cloud business will be a burden in the short term, but it should pay off for SAP in the long term. Attractive.

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