[ad_1]
Due to the corona pandemic, SAP customers are increasingly dependent on cloud services. On the one hand this is good, but on the other hand the business with data cloud software has lower margins than the classic licensing business. The worst medium-term outlook surprised investors on Monday.
The cloud business is becoming increasingly important to SAP – in the big picture, CEO Christian Klein. But it has lower margins than the classic licensing business.
For years SAP has been by far the most valuable German company. Even the crisis of the crown could hardly hurt the provider of business software for accounting, control, sales, purchasing and much more. The share price quickly rebounded from the pandemic-induced slide in March, and in early September SAP shares even hit an all-time high of around € 144. But on Monday the glory of the stock market ended. After an “earnings warning” published on Sunday and a revised medium-term outlook, the shares tumbled 22% to around 97 euros. That was the deepest price drop in more than 20 years.
Sharp margin drop
Since management around board spokesperson Christian Klein had only slightly revised the forecast for 2020 regarding key figures such as sales and operating profit, it quickly became clear that the reduction of the medium-term forecast in particular had surprised investors who were used to success. According to SAP, many clients are at a tipping point due to the Corona crisis. For many companies, the move to the cloud, combined with a business readjustment, has become essential. What sounds harmless means for SAP a negative effect on the operating margin of a whopping four to five percentage points in 2023. That was a disastrous announcement from an investor point of view. It didn’t help that SAP wants to massively increase revenue from the cloud in the next few years.
The short-term outlook for 2020 has a negative effect on the fact that the revival in demand in recent weeks following the renewal of restrictions on public life in some countries has been more moderate than management expected. In the third quarter, sales fell 4%, mainly due to currency effects. The euro, which was stronger against the dollar, posed problems for SAP, which is heavily represented in the United States. However, adjusted for these effects, revenues remained stable. The cloud business even grew 11%, but has lower margins than the company’s classic licensing business. SAP is the world market leader in business application software for enterprises, but the cloud services business is becoming increasingly important. The group has more than 400,000 clients in some 190 countries.
Entry opportunity for courageous investors
For the next few years, management expects moderate sales growth and a stagnant or even slightly lower operating result. Accelerated growth in sales and a double-digit increase in operating profit can only be expected from the relatively distant 2023 year. Due to this change in perspective, many financial analysts have lowered their thumbs and adjusted their price targets significantly downward. However, some credit the company that growth prospects remain intact and stick to price targets of around 140 euros.
For brave investors, the massive drop in stocks could be an opportunity to buy back the company’s shares to speculate on a quick rally. At least for investors with staying power, the risk-reward ratio looks attractive after the sharp drop in prices. And there is also some consolation for SAP, the group is still the most valuable company in the German stock index, ahead of Linde, Siemens and Volkswagen.
You can contact business editor Michael Rasch Twitter, LinkedIn and Xing, as well as NZZ Frankfurt on Facebook.
[ad_2]
