Software Stocks: Read This Before you Buy

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

Recently, SAP (NYSE: SAP) hosted its analysts’ day at CeBIT 2013, restating its confidence in its major growth pillars such as HANA, cloud, and mobile. The company seems to be confident about 2013, with the improvement in the overall spending environment in the economy.

SAP has around 2000 planned customer meetings this year during the event, which is up 100% from last year. Investors are quite happy with the announcements, and it reflected in the stock’s upside movement following the event. Let's dig into the company's recent initiatives and find out what opportunities they bring for an investor.

Attractive portfolio of products

Over the years, SAP has transformed from being just an application vendor to a software provider by enhancing its portfolio. The recently announced product suites give further confidence on its future growth trajectory.

  • SAP has seen remarkable growth in its key innovation area i.e. SAP HANA. HANA had a great last quarter, with around $250 million of software revenue taking the total to $510 million for 2012. In January 2013, the company launched its ERP business package on HANA, which was about a year ahead of analysts’ anticipation. This move by the company, takes it one step further in its game-changing technology, HANA, which commands strong customer interest. I believe this will drive a new phase of investment in applications at its existing customers, as in 2012 most of the HANA deals were from the existing SAP customers. As per the company's guidance, HANA revenue is expected to reach around $910 million in 2013.
  • If HANA was the growth driver for the last two years, its cloud business will be the same for its future. The company is on track with its 2015's target of $2.6 billion of cloud revenue. SAP's acquisition of SuccessFactors and Ariba in the last two years has made it a leading player in the cloud market, with four times more users than the nearest competitor. With this huge base of customers, the company is aiming at about $1.3 billion of cloud revenue in 2013.

The competition – who wins the race?

SAP recently released 'SAP 360 Customer' to enhance its CRM (customer relationship management) solutions. This is a bundle of different technologies, namely social, cloud, mobile, and big data. With this move, SAP is trying to be different from other cloud vendors such as Salesforce.com (NYSE: CRM) and Oracle (NYSE: ORCL).

These three companies are the big players in the cloud-based solutions related to CRM and ERP (enterprise resource planning). Initially, these companies were on different levels of the processes, but over the time, they have started meddling in each other's core territory. Consequently, all the three are currently focused on cloud based solutions as their biggest opportunity.

CRM is one of the most advanced applications which is adopted in the cloud, and Salesforce.com has already established its presence in this market. SAP's latest offering, SAP 360, will directly compete with Salesforce.com. This time, SAP is trying to couple its cloud offering with in-memory analytics platform HANA. This will help companies run CRM on HANA's in-memory platform, which will lead to improved productivity. With this initiative SAP should boost its market share in the cloud-based CRM market.

I feel both Oracle and SAP have an added advantage over Salesforce.com with their strong client base to support short-term growth. Cross-selling is one of the major factors behind their growth, as it is easier for the customers to move within. On the contrary, Salesforce.com has the best opportunity among small and mid-size companies, which are looking for solutions at reasonable costs. Overall, both SAP and Oracle hold the top spots in the market, but the gap is closing swiftly with new and small players moving in.

The stock's opportunity

Over the last few months, SAP has been quite volatile. Its product strategy is strong, and the success of its various products is the end result of its long-term strategic decisions. Moreover, the newly launched products and solutions open a much wider opportunity for the company to cash in. I believe, with these announcements, the stock will gain some stability based on the future revenue generation prospects. This stock is a safe bet for me from a long-term perspective.


Madhu Dube has no position in any stocks mentioned. The Motley Fool recommends Salesforce.com. The Motley Fool owns shares of Oracle.. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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