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SAP Stock Jumps 49.4% YTD: Will the Upward Trend Continue?

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SAP SE (SAP - Free Report) is witnessing strong momentum, with shares having gained 49.4% year to date compared with the S&P Composite’s growth of 19.7%.

SAP is one of the largest independent software vendors in the world. It is also the leading provider of enterprise resource planning (ERP) software.

The company’s performance is benefiting from continued strength in its cloud business across all regions. Driven by strength in the cloud business, it reported total revenues on a non-IFRS basis of €7.744 billion ($8.428 billion), improving 4% year over year (up 9% at constant currency or cc) in the last reported quarter.

Its efforts have received a major push with the launch of Rise with SAP solution. This solution helps companies to transform their business processes and operations to become more nimble, digital and intelligent. RISE with SAP solution continues to gain significant traction and will aid the company to drive its market share in the cloud ERP solutions’ space.

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In the third quarter of 2023, this solution was adopted by clients including ADAC, Alnatura, BC Hydro, Bobst Mex, Constellium, Graybar, Hitachi Zosen Corporation, KAESER KOMPRESSOREN, LG Electronics, LG Energy Solution, PUMA, Siemens Healthineers and University of Leeds.

Frequent product launches like Grow with SAP and SAP Datasphere as well as strategic acquisitions and collaborations bode well. SAP expects to achieve €21.5 billion in cloud revenues by 2025.

A Look at Other Catalysts

Momentum in SAP’s business technology platform, particularly S/4HANA solutions, augurs well. More companies have begun deploying S/4HANA solution partly or entirely in the cloud. In the third quarter of 2023, SAP S/4HANA cloud revenues increased 67% (up 77% at cc) year over year to €914 million. SAP S/4HANA’s current cloud backlog rose 58% (up 66% at cc) year over year.

Rise with SAP will also help the company to boost the uptake of its SAP S/4HANA solution by providing customers with more options for implementation and support from certified partners.

SAP remains optimistic about generative AI trend and expects it to positively impact revenues going forward. In September 2023, management unveiled Joule, an innovative AI copilot driven by natural language and generative capabilities. Joule will be released with SAP SuccessFactors solutions and SAP Start later this year, followed by integration with SAP S/4HANA Cloud.

Joule will be integrated into the company's cloud enterprise suite and offer proactive, contextual insights from SAP solutions and third-party sources. This will likely help customers to make faster and more informed decisions while ensuring security and compliance. It will also help to transform the user experience across departments.

Building on existing SAP Business AI offerings, Joule aligns with the firm’s broader strategy to cultivate an enterprise AI ecosystem, involving direct investments and strategic partnerships with leading tech players. Prior to that, it had inked an agreement with Microsoft for teaming up on generative AI solutions to aid clients in addressing the talent gap with new recruitment and development tools.

It also invested funds in three companies, Aleph Alpha, Anthropic and Cohere, which are engaged in generative AI. Management plans to roll out new AI solutions across its portfolio later in the year.

SAP's strong business momentum and Qualtrics divestiture have prompted it to boost capital returns. It has announced a new share repurchase program with a volume of up to €5 billion in May 2023 commencing from the second half of 2023. This program is projected to be fully completed by 2025 end. This new authorization is in line with its repurchases of 14 million shares for €1.5 billion in 2020 and around 16 million shares worth €1.5 billion in 2022. As of Sep 29, SAP had repurchased 7,190,252 shares at an average price of €125.49. SAP has shares worth €902 million left under the program

Headwinds Remain

However, SAP’s performance is affected due to continued softness in the Software license and support business segment. In the third quarter, Software license and support revenues came in at €3.208 billion, which decreased 6% (down 2% at cc) year over year. Non-IFRS software license revenues of €335 million declined 17% (down 14% at cc) year over year.

Further, global macroeconomic weakness, inflation and bumpy economic recovery in China remain concerns for this Zacks Rank #3 (Hold) stock.

A Look at Estimates

SAP’s earnings per share are indicated to climb 26.2% and 21.3% on a year-over-year basis to $5.40 and $6.55 in 2023 and 2024, respectively.  Revenues for 2023 and 2024 are projected to rise 3.6% and 8.6% to $33.64 billion and $36.5 billion, respectively.

Stocks to Consider

Some other top-ranked stocks worth consideration in the broader technology space are Adobe (ADBE - Free Report) , Synopsys (SNPS - Free Report) and Watts Water Technologies (WTS - Free Report) , each carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

The Zacks Consensus Estimate for Adobe’s fiscal 2023 EPS has inched up by 0.1% in the past 60 days to $15.93. ADBE’s long-term earnings growth rate is 13.5%.

Adobe’s earnings beat the Zacks Consensus Estimate in each of the last four quarters, the average surprise being 3.3%. Shares of ADBE have surged 88.3% in the past year.

The Zacks Consensus Estimate for Synopsys’ fiscal 2024 EPS has remained flat in the past 30 days at $12.52. SNPS’ long-term earnings growth rate is 16.7%. Shares of SNPS have gained 64.9% in the past year.

The Zacks Consensus Estimate for Watts Water Technologies 2023 EPS has improved 2.8% in the past 60 days to $8.00.

WTS’ earnings outpaced the Zacks Consensus Estimate in each of the last four quarters, the average earnings surprise being 11.8%. Shares of WTS have surged 28.9% in the past year.

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