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German software giant, SAP SE (SAP - Free Report) , announced that it has earmarked a whopping $2.2 billion for the expansion of its Internet of Things portfolio. SAP is also acquiring Italian IoT firm Plat.One as part of its IoT initiative.

SAP believes that the worldwide market for connected sensors and smart devices will be worth about €250 billion ($279 billion) by the end of this decade. Thus, this huge investment is part of a major push into the budding IoT (Internet of Things) space which will aid SAP in staying ahead of the curve.

SAP’s Initiatives

One of SAP’s acquisitions is Plat.One, which develops a platform used for creating, deploying, and managing IoT applications. The Plat.One platform has been designed for large-scale implementations, and offers IoT and machine-to-machine (M2M) application development tools, along with data and device management capabilities.

Plat.One’s solutions will enable SAP to integrate essential IoT capabilities (such as device lifecycle management and connectivity, and IoT edge capabilities) into the SAP HANA Cloud Platform.

SAP’s recent acquisition of Norwegian analytics software maker – Fedem Technology – which specializes in engineering analysis software will empower SAP to foster IoT’s analytics section. SAP plans to leverage on Fedem’s capabilities to develop a service in which digital avatars of buildings and industrial machines can be created using IoT sensors and feeds. In essence, these avatars will replace the need for physical, on-site inspection, as they will provide a visual illustration of the state of IoT assets.

SAP is also releasing a series of "jump-start" and "accelerator" IoT software packages, designed to monitor and control IoT software and equipment, for a broad range of industries.

SAP’s IoT Strategy

The company declared that it will launch a new product line — SAP IoT — which will integrate huge amounts of data from things connected to the Internet, with machine learning and SAP's real-time database S/4 HANA. SAP will focus on transforming this data into intelligent, actionable services and insights, which will enable firms to pursue new opportunities, improve internal operations and discover ways of engaging with customers.

Further, SAP also plans to open SAP IoT Labs globally, in order to foster engagement with local IoT startups and partners. The IoT development labs will also act as hubs for IoT research and development. SAP plans to start with Johannesburg, Palo Alto, Berlin, Munich, Shanghai and São Leopoldo, Brazil.

In addition to research and collaboration, the company has also reserved part of its $2.2-billion fund for targeted acquisitions, like small bolt-on deals that are a good fit with SAP's IoT portfolio.

SAP AG ADR Price and Consensus

Summing Up

According to research firm Gartner, over 21 billion IoT devices will be in use worldwide by the year 2020, up from fewer than 5 billion last year. IoT functions are increasingly being used in manufacturing and diverse areas such as digital farming, logistics, drones or 3D printing.

For SAP, the investment represents a step to ensure that its data analysis software stays at the heart of businesses’ processes. In fact, SAP’s focus on the details of specific industries’ processes may provide it an edge over some competitors.

Last week, SAP and German car parts maker, Robert Bosch, announced an alliance to integrate their software and consulting capabilities. We believe that SAP’s IoT initiatives are on the right track and more such deals could follow, fuelling growth for this Zacks Rank #3 (Hold) company.

Stocks to Consider

Some better-ranked stocks in the same space include Adobe Systems Incorporated (ADBE - Free Report) , Aspen Technology, Inc. (AZPN - Free Report) and Callidus Software Inc. (CALD - 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.

Adobe Systems is a leading player in the computer software space. The company has a striking earnings surprise history over the trailing four quarters, having beaten estimates all through, for an average beat of 5.6%.

Aspen Technology deals in process optimization software and services. It boasts a remarkable average surprise of 24.3% over the trailing four quarters, beating estimates comfortably in each of them.

Callidus Software is a provider of Enterprise Incentive Management software, with a modest earnings history. It has beaten estimates twice in the trailing four quarters, however still managed to garner an average surprise of 14.8%.

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