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SAP Stock Surges 65% in the Past Year: Will the Rally Last?
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The SAP SE (SAP - Free Report) stock is continuing its upward trajectory with a rise of 64.7% in the past year compared with 27.5% and 58.9% growth of the S&P 500 Composite and the sub-industry, respectively.
SAP is one of the largest independent software vendors in the world and the leading provider of enterprise resource planning (ERP) software. SAP boasts an extensive partner ecosystem with more than 20,000 partners worldwide in over 140 countries.
SAP’s performance is benefiting from continued strength in its cloud business, especially the Rise with SAP and Grow with SAP solutions.
On a year-over-year basis, revenues for 2024 and 2025 are projected to rise 8.3% and 12.2%, respectively, to $36.51 billion and $40.95 billion. SAP’s earnings per share (EPS) are indicated to climb 15.7% on a year-over-year basis to $7.44 in 2025. The long-term EPS growth rate is 11.4%
The company carries a Zacks Rank #2 (Buy) at present.
Image Source: Zacks Investment Research
Catalysts Driving Growth
SAP has been primarily concentrating on expanding its cloud business to become one of the leading players in the category. Current cloud backlog — a key indicator of go-to-market success in cloud business — increased 25% (up 27% at cc) to €13.75 billion in the last reported quarter.
The company’s 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. The solution continues to gain significant traction and will aid the company drive its market share in the cloud ERP solutions’ space.
Momentum in SAP’s business technology platform, particularly S/4HANA solutions, augurs well. More companies have begun deploying S/4HANA solutions partly or entirely in the cloud. In the fourth quarter of 2023, SAP S/4HANA cloud revenues increased 55% (up 61% at cc) year over year to €1.03 billion. SAP S/4HANA’s current cloud backlog was up 58% (up 61% at cc) year over year. Rise with SAP will also help the company boost the uptake of its SAP S/4HANA solution by providing customers with more options for implementation and support from certified partners.
Frequent product launches like Grow with SAP and SAP Datasphere, as well as strategic acquisitions and collaborations, bode well for its cloud business.
Management remains optimistic about generative AI trend and expects it to positively impact revenues going forward. The company recently announced that it will be focusing on vital strategic growth areas, especially Business AI, and position the company for future growth. It will be taking up a restructuring program in 2024 whereby it plans to eliminate 8,000 positions across its operations to ensure the company’s skill-set and resources are well-poised to meet future business requirements.
It expects to incur around €2 billion in restructuring expenses. The majority of these expenses is expected to be recognized in the first half of 2024, thereby affecting IFRS operating profit. The restructuring program is not expected to provide major cost benefit in 2024, per management.
Outlook
Management anticipates cloud revenues for 2024 in the range of €17-€17.3 billion, suggesting an increase of 24-27% at cc from the prior-year levels. Cloud and software revenues are now expected to be between €29 billion and €29.5 billion, implying 8-10% growth at cc from the year-earlier actual
Management projects non-IFRS operating profit in the range of €7.6-€7.9 billion, indicating a rise of 17-21% at cc. Free cash flow is estimated to be €3.5 billion.
Also, the company revised its guidance for some metrics for 2025. Non-IFRS cloud gross profit is expected to be €16.2 billion (including share-based compensation expenses of €0.1 billion) compared with the earlier projection of €16.3 billion (excluding share-based compensation expenses).
Non-IFRS operating profit is now anticipated to be €10.0 billion (which includes share-based compensation expenses of €2 billion) compared with €11.5 billion (excluding share-based compensation expenses) projected earlier.
Free cash flow is now forecast to be €8.0 billion compared with the earlier projection of €7.5 billion.
The company continues to expect cloud revenues of more than €21.5 billion and total revenues of more than €37.5 billion for 2025.
Few Headwinds
owever, continued softness in the Software license and support business segment coupled with global macroeconomic weakness are concerning. Increasing costs and stiff competition are additional headwinds.
Other Stocks to Consider
Some other stocks worth considering in the broader technology space are Manhattan Associates (MANH - Free Report) , Watts Water Technologies (WTS - Free Report) and Microsoft (MSFT - Free Report) . While Manhattan Associates sports a Zacks Rank #1 (Strong Buy), Watts Water and Microsoft carry a Zacks Rank of 2 each, at present. You can see the complete list of today’s Zacks #1 Rank stocks here.
The Zacks Consensus Estimate for MANH’s 2024 EPS has increased 3.6% in the past 60 days to $3.76. Manhattan Associates’ earnings beat the Zacks Consensus Estimate in each of the last four quarters, the average surprise being 27.6%. Shares of MANH have surged 74% in the past year.
The Zacks Consensus Estimate for Watts Water’s 2024 EPS has improved 10 cents to $8.54 in the past seven days. The long-term earnings growth rate is 7.8%. Shares of WTS have jumped 13.1% in the past year.
The Zacks Consensus Estimate for Microsoft’s fiscal 2024 EPS is pegged at $11.63, indicating growth of 18.6% from the year-ago level. Microsoft’s earnings beat the Zacks Consensus Estimate in each of the last four quarters, the average surprise being 8.8%. The long-term earnings growth rate is 16.2%. MSFT has risen 63.4% in the past year.
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SAP Stock Surges 65% in the Past Year: Will the Rally Last?
The SAP SE (SAP - Free Report) stock is continuing its upward trajectory with a rise of 64.7% in the past year compared with 27.5% and 58.9% growth of the S&P 500 Composite and the sub-industry, respectively.
SAP is one of the largest independent software vendors in the world and the leading provider of enterprise resource planning (ERP) software. SAP boasts an extensive partner ecosystem with more than 20,000 partners worldwide in over 140 countries.
SAP’s performance is benefiting from continued strength in its cloud business, especially the Rise with SAP and Grow with SAP solutions.
On a year-over-year basis, revenues for 2024 and 2025 are projected to rise 8.3% and 12.2%, respectively, to $36.51 billion and $40.95 billion. SAP’s earnings per share (EPS) are indicated to climb 15.7% on a year-over-year basis to $7.44 in 2025. The long-term EPS growth rate is 11.4%
The company carries a Zacks Rank #2 (Buy) at present.
Image Source: Zacks Investment Research
Catalysts Driving Growth
SAP has been primarily concentrating on expanding its cloud business to become one of the leading players in the category. Current cloud backlog — a key indicator of go-to-market success in cloud business — increased 25% (up 27% at cc) to €13.75 billion in the last reported quarter.
The company’s 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. The solution continues to gain significant traction and will aid the company drive its market share in the cloud ERP solutions’ space.
Momentum in SAP’s business technology platform, particularly S/4HANA solutions, augurs well. More companies have begun deploying S/4HANA solutions partly or entirely in the cloud. In the fourth quarter of 2023, SAP S/4HANA cloud revenues increased 55% (up 61% at cc) year over year to €1.03 billion. SAP S/4HANA’s current cloud backlog was up 58% (up 61% at cc) year over year. Rise with SAP will also help the company boost the uptake of its SAP S/4HANA solution by providing customers with more options for implementation and support from certified partners.
Frequent product launches like Grow with SAP and SAP Datasphere, as well as strategic acquisitions and collaborations, bode well for its cloud business.
Management remains optimistic about generative AI trend and expects it to positively impact revenues going forward. The company recently announced that it will be focusing on vital strategic growth areas, especially Business AI, and position the company for future growth. It will be taking up a restructuring program in 2024 whereby it plans to eliminate 8,000 positions across its operations to ensure the company’s skill-set and resources are well-poised to meet future business requirements.
It expects to incur around €2 billion in restructuring expenses. The majority of these expenses is expected to be recognized in the first half of 2024, thereby affecting IFRS operating profit. The restructuring program is not expected to provide major cost benefit in 2024, per management.
Outlook
Management anticipates cloud revenues for 2024 in the range of €17-€17.3 billion, suggesting an increase of 24-27% at cc from the prior-year levels. Cloud and software revenues are now expected to be between €29 billion and €29.5 billion, implying 8-10% growth at cc from the year-earlier actual
Management projects non-IFRS operating profit in the range of €7.6-€7.9 billion, indicating a rise of 17-21% at cc. Free cash flow is estimated to be €3.5 billion.
Also, the company revised its guidance for some metrics for 2025. Non-IFRS cloud gross profit is expected to be €16.2 billion (including share-based compensation expenses of €0.1 billion) compared with the earlier projection of €16.3 billion (excluding share-based compensation expenses).
Non-IFRS operating profit is now anticipated to be €10.0 billion (which includes share-based compensation expenses of €2 billion) compared with €11.5 billion (excluding share-based compensation expenses) projected earlier.
Free cash flow is now forecast to be €8.0 billion compared with the earlier projection of €7.5 billion.
The company continues to expect cloud revenues of more than €21.5 billion and total revenues of more than €37.5 billion for 2025.
Few Headwinds
owever, continued softness in the Software license and support business segment coupled with global macroeconomic weakness are concerning. Increasing costs and stiff competition are additional headwinds.
Other Stocks to Consider
Some other stocks worth considering in the broader technology space are Manhattan Associates (MANH - Free Report) , Watts Water Technologies (WTS - Free Report) and Microsoft (MSFT - Free Report) . While Manhattan Associates sports a Zacks Rank #1 (Strong Buy), Watts Water and Microsoft carry a Zacks Rank of 2 each, at present. You can see the complete list of today’s Zacks #1 Rank stocks here.
The Zacks Consensus Estimate for MANH’s 2024 EPS has increased 3.6% in the past 60 days to $3.76. Manhattan Associates’ earnings beat the Zacks Consensus Estimate in each of the last four quarters, the average surprise being 27.6%. Shares of MANH have surged 74% in the past year.
The Zacks Consensus Estimate for Watts Water’s 2024 EPS has improved 10 cents to $8.54 in the past seven days. The long-term earnings growth rate is 7.8%. Shares of WTS have jumped 13.1% in the past year.
The Zacks Consensus Estimate for Microsoft’s fiscal 2024 EPS is pegged at $11.63, indicating growth of 18.6% from the year-ago level. Microsoft’s earnings beat the Zacks Consensus Estimate in each of the last four quarters, the average surprise being 8.8%. The long-term earnings growth rate is 16.2%. MSFT has risen 63.4% in the past year.