The share of software manufacturer SAP has regained its former strength after a strategic realignment and reached an unprecedented price of over 144 euros on the stock exchange. The market capitalization of the most valuable company in the German leading index Dax has risen to almost 180 billion euros. For CEO Christian Klein, this is a triumph after the pandemic had previously led to a strategic realignment. The unpopular decision to shift the business to the cloud more quickly had initially led to selling pressure among already uncertain shareholders. However, now the company has made up for these losses and thus demonstrates that Klein's strategy is successful and the transition to the cloud is progressing.
Experts such as investment bank Morgan Stanley see a major opportunity for investors in the current situation at SAP. The introduction of the new product generation S/4 Hana has led to a "large upgrade cycle," as stated in a report by Morgan Stanley. The low market penetration of the new products offers significant growth potential according to experts. This convinced the US bank to recommend buying SAP shares and set a target price of 150 euros. In total, 21 out of the 32 analysts recorded by Bloomberg recommend buying the stock, while nine recommend holding and only one recommends selling.
The S/4 Hana software package, which is used by many companies to modernize their finance department and optimize processes, leads to a better cash flow, as monthly fees are incurred for its use. Additionally, SAP benefits from additional sales of complementary products as a result of such projects. Although the company's realignment has led to conflicts among existing customers, it is proving to be successful. In the third quarter, SAP was able to increase revenue from cloud services by 16 percent and generate more profit at the same time. Financial Chief Dominik Asam emphasized to analysts that profitability in the cloud business could be further increased. The expansion of profit margins contributes to the positive development of the stock price, as Mirko Meier of LBBW emphasizes. The company is keeping its promise to improve profitability.
The SAP share also benefits from a positive market trend. Technology companies have seen significant price increases in recent months. This is also evident in the Nasdaq 100, which includes companies such as Apple, Amazon, Alphabet, Meta, and Netflix with a high weight. The index has been up around 47 percent since the beginning of the year. The declining inflation rate gives hope that interest rates will not continue to rise. This is particularly important for growth companies, which often react sensitively to interest rates, as UBS analyst Michael Briest emphasizes.
The rapid development of Artificial Intelligence also sparks imagination and drives the SAP stock. According to Mirko Maier from LBBW, the hype around AI is far from over, as demonstrated by major providers like Microsoft and their early successes. This also has a positive impact on SAP, as the company has promising future prospects with its assistant Joule, investments in start-ups like Aleph Alpha, and price increases of up to 30 percent.
The reweighting of important German stock indices will also have a positive impact on SAP. The Deutsche Börse will raise the cap for individual values, thereby exempting SAP from a possible penalty. Currently, the company repeatedly reaches the maximum limit of 10 percent in the Dax and TecDax, which leads to sales by funds that track these indices. This will no longer be the case as of March 18, 2024 when individual values may account for up to 15 percent.
For SAP, the situation remains challenging despite its current success. In order to achieve the set goals, the workforce has had to make efforts in the past years, particularly through strict cost-cutting measures and price increases. This will not become easier in the coming months either. According to UBS analyst Briest, achieving the annual forecast in the cloud business requires further growth of 25 to 29 percent, which is a demanding task considering the economic uncertainties. SAP also needs to improve profitability in order to meet expectations. Analyst Mirko Maier from LBBW emphasizes that this indicator is particularly important and a decrease in margins could result in loss of value. SAP's success story as a cloud company is therefore not yet complete.
