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SAP (SAP) to Beat Q4 Earnings on Growing Cloud Business?

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SAP SE (SAP - Free Report) is scheduled to report fourth-quarter fiscal 2017 results before the opening bell on Jan 30.

SAP has an excellent earnings surprise history, with an average positive surprise of 4% in the trailing four quarters. Last quarter, the company’s adjusted earnings beat the Zacks Consensus Estimate by 4.4%.

Let’s see how things are shaping up prior to this announcement.

Factors to Consider 

SAP has established itself as a trusted partner for business enterprises who seek to transform the entire landscape of operations including applications, cloud, business networks and platforms. With business enterprises leveraging on state-of-the-art technology to outshine peers, we believe that the company’s market leading portfolio will continue to witness increased demand, consequently supplementing the company’s financials. 

Over the past few quarters, the company has recorded spectacular growth in S/4HANA and other Cloud initiatives, which in turn, has provided a boost to financials. During third-quarter 2017, the company gained 600 customers, of which 40% was entirely new. The company anticipates demand for S/4 HANA to surge, which will prove conducive to operating profit and bottom-line growth in the to-be reported quarter. Further, the company’s strategic actions to reinforce thriving business network are likely to prove conductive to upcoming results.

Moreover, the company’s human capital management applications are gaining tremendous popularity with several international organizations. Solid adoption of the company’s human capital management applications, led by SuccessFactors Employee Central, is expected to drive the results in the upcoming quarter. Further, cloud subscriptions and support revenues are anticipated to surpass software license revenues in 2018, thereby supplementing the company’s financial performance.

However, the fact remains that dull prospects of the global IT industry in recent quarters, along with flat customer spending projections are adversely affecting the company’s performances. This apart, over the past few quarters, many of the company’s emerging markets have faced fiscal imbalances and general economic slowdowns, which adversely impacted purchasing power. Also, sluggishness in China might dent the IT spending in the country, which might reflect poorly on the upcoming quarterly results.

Moreover, the inherent seasonality in technology spending on part of clients exposes the company’s sales to risks of quarterly fluctuations. Also, the IT services industry is characterized by stiff competition from technology behemoths, which in turn may also dampen the upcoming financials. This apart, currency fluctuations in many of its key markets are also likely to thwart sales for the fourth-quarter results.

Earnings Whispers

Our proven model does not conclusively show an earnings beat for SAP this time around. This is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) for this to happen. But that is not the case here as you will see below.

Zacks ESP: Earnings ESP for the company is 0.00%, as both the Most Accurate estimate and the Zacks Consensus Estimate are pegged at $1.78. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

SAP SE Price and EPS Surprise

SAP SE Price and EPS Surprise | SAP SE Quote

Zacks Rank: SAP has a Zacks Rank #3, which increases the predictive power of the ESP. However, the company’s ESP of 0.00% makes surprise prediction difficult.

We caution against Sell-rated stocks (Zacks Rank #4 or 5) going into an earnings announcement, especially when the company is seeing negative estimate revisions.

Other Stocks to Consider

Here are some other companies that you may want to consider, as our model shows that these too have the right combination of elements to post an earnings beat this quarter:

Aspen Technology, Inc. (AZPN - Free Report) has an Earnings ESP of +11.11% and a Zacks Rank #1.  You can see the complete list of today’s Zacks #1 Rank stocks here.

MSCI Inc (MSCI - Free Report) has an Earnings ESP of +0.86% and a Zacks Rank #2.

AMTEK, Inc. (AME - Free Report) has an Earnings ESP of +0.12% and a Zacks Rank #2.

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