SAP: A Future of Infinite Possibilities

Shas is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

SAP AG (NYSE: SAP) has been the market leader in enterprise management software for over a decade now. It is the global market leader in Enterprise Resource Planning (ERP) and offers services to a range of global corporations. The company provides business suites which help its clients improve customer relations, increase productivity and keep track of their transactions. After the 2008 recession, the company has gone through major restructuring to cut back on costs and has emerged as a lean and highly innovative organization. It has started to focus on big data crunching, faster and smarter analysis of database and application development for mobile platforms to enable managers to keep track of business operations through smartphones. Recent trends have seen corporations increasing their IT spending backed by a robust global economic recovery, and SAP, with its future-oriented products, is best positioned to take maximum advantage.

Earnings Analysis

SAP released its Q4 2012 earnings data on Jan. 23, and the results were above market expectations. Revenue for the quarter rose by 12% and stood at $6.6 billion. The operating profit, however, took a hit and decreased by 5% to $2.1 billion. The profit margin from operations also decreased by 5.5 percentage points and stood at 31.6%. A company statement said that the decline in operating profit was due to a steep increase in “share based compensation expenses,” which rose sharply due to an increase in its stock price. Revenues from the software operations showed a healthy increase of 8%, which can be attributed to strong increases in its license based revenues.

The company’s American operations also delivered well above expectations with a 3% increase in software revenue. The company is also performing well in cloud services, where it is a dominant player in enterprise business solutions. A significant point to be noted is the fact that the Asia Pacific and Japan region, where company expects at least 40% of its global revenue by 2015, has grown by an impressive rate of 22%. This means that the company is increasing its penetration in enterprises located in the region, especially in India and China, which are projected to be the major centers of growth. In my opinion, the company can expect a higher percentage of revenue coming from cloud and big data related products as more and more companies make the transition towards leaner business operations. A major area of concern, though, is slowing sales of new licenses in the Americas as the market has started to show signs of saturation.

Pathbreaking Product Launches

Over the last few years, SAP has been working towards redefining the enterprise software market. Multiple product launches that have the capacity to change the way organizations work have reinforced investor confidence in the company. A new software platform named HANA is considered to be the next growth driver for the company. HANA has the capability to process big data and address complex problems organizations are facing today with huge data size/variety and deliver meaningful insights out of it. According to SAP, the software can run complex reports which used to take multiple hours to work on in a matter of seconds, as it works directly with memory chips rather than on a separate hard drive.

SAP has recently started focusing on mobile business applications, and in 2010 it acquired Sybase, a mobile software platform maker, for $5.8 billion. Coupled with cloud and HANA, there is immense potential for the company to grow in the next 10 years. These launches have enabled the company to become the only vendor to offer an entire range of products that can analyze data in real time on a single platform.

Position Against Competition

Two major competitors for SAP are Oracle (NYSE: ORCL) and Salesforce.com (NYSE: CRM). Oracle posted robust earnings figures for the quarter ending Nov. 30. It registered double digit growth in every segment, especially in Oracle Applications with 30% growth. The company is increasing its influence in the cloud computing arena and won many big customers last year, such as Facebook, Time Warner and Chevron among others. SAP has gained a competitive advantage in the  last few years over Oracle with its innovative products and has switched many organizations over to its applications.

Salesforce.com has successfully positioned itself as the leading supporter of the social revolution, as it is the biggest partner of Facebook. It is consistently growing at a 30% plus rate and is a major threat to market majors such as SAP and Oracle, especially in the new generation computing applications.

Stock Analysis

After the declaration of results, analysts at Citi and UBS have downgraded the stock for the near future on fears of further reductions in license renewal revenue and new license purchases. The current PE ratio stands at 26.47, which is a peak value when compared to last year and hence indicates a mild saturation in stock price. Going ahead, there is the possibility of small price correction, mostly due to possible corrections in the market as a whole as it seems to have reached a resistance point. The stock traded well above its 20-day EMA and 50-day EMA in December before falling below in early January. In my opinion, in the next few weeks the stock will regain its position relative to its EMA values. As the quarterly results are favorable and the fundamentals are strong, it is wise to stay invested in the stock with long term perspective.


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