SAP Stock Skyrockets 36.7% Year-to-Date: Is the Rally Sustainable?
SAP SE (NYSE: SAP) has been on a remarkable run, with its stock price surging 36.7% year-to-date, significantly outperforming the S&P 500 composite (13.3%) and its sub-industry (6.2%). This growth, coupled with a favorable Zacks Rank #2 (Buy) and a VGM Score of B, makes SAP an intriguing investment prospect. However, the recent pullback from its 52-week high raises questions about the sustainability of its rally.
Key Takeaways:
- Cloud Business Is Thriving: SAP’s cloud revenue surged 25% year-over-year in Q2 2024, driven by strong demand for its Rise with SAP solution and other cloud offerings.
- Generative AI Focus: SAP is embracing generative AI and its potential to transform business processes, particularly in the supply chain sector.
- Robust Outlook: Management anticipates strong cloud revenue growth in 2024 and 2025, indicating continued momentum in this key business segment.
- Zacks Rank and Analyst Sentiment: SAP’s Zacks Rank #2 and upward revisions to earnings estimates in recent months underscore analysts’ optimism about the company’s future prospects.
SAP’s Thriving Cloud Business
SAP’s transformation into a cloud-centric company is paying off. The company’s current cloud backlog, a crucial metric for cloud business success, jumped 28% (at both nominal and constant currency basis) to €14.8 billion in the last reported quarter.
The primary driver behind this growth is the increasing demand for Rise with SAP, a solution aimed at helping companies digitize and streamline their business processes. This solution has proven to be a significant catalyst in bolstering SAP’s market share in the cloud ERP solutions space.
Rise with SAP also facilitates the adoption of SAP S/4HANA, a comprehensive ERP solution, by providing customers with varied implementation and support choices through certified partners. Other cloud offerings like Grow with SAP, focusing on small and mid-sized enterprises, and SAP Datasphere, a data management platform, are also contributing to the company’s cloud success.
SAP’s cloud growth has been particularly robust in regions like India, Japan, South Korea, Germany, Brazil, and Canada. Notably, its cloud business remains strong in the United States, Saudi Arabia, and China. This global reach underscores the company’s potential for sustained growth in the cloud market.
SAP’s Robust Outlook for Cloud Business
Capitalizing on the strong momentum in its cloud business, SAP has set ambitious targets for the coming years. Management projects 2024 cloud revenues to fall within €17-€17.3 billion, representing a year-over-year growth of 24-27% at constant currency. Overall cloud and software revenues are expected to range between €29 billion and €29.5 billion, indicating an 8-10% growth at constant currency.
For 2025, SAP is aiming for cloud revenues exceeding €21.5 billion and total revenues exceeding €37.5 billion. These projections showcase the company’s commitment to driving sustained growth in its cloud business and maintaining its leadership position in the market.
SAP Focused on Generative AI
Recognizing the transformative potential of generative AI (GenAI), SAP has been investing heavily in this technology, particularly in enhancing its supply chain solutions. In April 2024, SAP announced significant advancements in AI for supply chain optimization, aiming to boost productivity and efficiency in manufacturing sectors.
To further strengthen its GenAI capabilities, SAP has entered into collaborations with industry giants IBM and Amazon Web Services. These partnerships are crucial for unlocking new business opportunities and expanding SAP’s reach within the burgeoning GenAI market.
Earlier in 2024, SAP outlined its strategy to prioritize key growth areas, particularly Business AI, to position itself for future success. In pursuit of this strategy, the company has undertaken restructuring efforts, anticipating total expenses of approximately €3 billion. This initiative is essential for aligning SAP’s workforce and resources with its long-term business ambitions.
Headwinds on the Horizon
Despite the optimism surrounding SAP’s cloud business and generative AI initiatives, some headwinds remain. The company acknowledges softness in the software license and support business segment, a trend likely influenced by the challenging global macroeconomic environment.
Furthermore, the competitive landscape in the cloud space remains intense, leading to increasing costs and fierce competition. SAP must navigate these pressures effectively to maintain its market share and profitability.
SAP’s Estimates Northbound
Analysts are optimistic about SAP’s future prospects, reflected in the upward revisions to earnings estimates. The Zacks Consensus Estimate for SAP’s 2024 revenues stands at $36.7 billion, indicating a year-over-year growth of 8.8%. For 2025, the consensus estimate for revenues is pegged at $40.6 billion, representing a 10.6% increase from the previous year’s level.
The consensus estimate for 2024 EPS is $4.83, while the 2025 EPS estimate is $6.33, signifying a substantial 31.2% year-over-year growth. These estimates have been revised upward by 5% and 3.3% in the past 60 days, showcasing analysts’ growing confidence in the company’s performance.
Other Stocks to Consider
As investors explore opportunities in the broader technology sector, other top-ranked companies deserve consideration.
- Manhattan Associates (NASDAQ: MANH) boasts a Zacks Rank #1 (Strong Buy) and has consistently beaten earnings expectations in recent quarters. Its stock price has surged 23.4% in the past year, reflecting the company’s strong growth trajectory.
- Adobe (NASDAQ: ADBE) maintains a Zacks Rank #2 (Buy) and has a solid track record of exceeding earnings estimates. However, its stock price has declined slightly over the past year.
- ANSYS (NASDAQ: ANSS) also carries a Zacks Rank #2 and has a strong earnings track record. Its stock price has declined in the past year, potentially presenting a buying opportunity for investors.
Conclusion
SAP’s impressive year-to-date stock performance is a testament to its successful transition to a cloud-centric model and its commitment to embracing emerging technologies like generative AI. While the company faces some headwinds, its robust cloud business, optimistic outlook, and analyst confidence make it a compelling investment prospect for growth-oriented investors. However, investors should carefully consider the company’s near-term challenges and monitor its progress in navigating these headwinds before making any investment decisions.
