Short Term Risks Persist in This Tech Stock

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

SAP (NYSE: SAP) has been out of investors’ favor this year. The optimism about the HANA database has been replaced by worries about software sales and economic slowdown in China and Europe. As a result, the stock is down 8% this year. Its recent earnings report has not changed the investors’ moods, as the company missed estimates. Are things really gloomy for the European software giant?

Trash talk

A big part of the earnings call was dedicated to trash-talk competition. SAP stated that it was growing faster than Oracle (NYSE: ORCL), Salesforce and NetSuite. The company thinks that it impacts competitors like Workday, which saw a deceleration in bookings growth.

SAP added that it thinks that multiple partnerships by competition would make things worse for their customers, bringing confusion. Oracle has been the friendly guy, making friends with Salesforce, Microsoft and NetSuite. In my opinion, it was not a bad move by Oracle, as the company has enlarged its potential customer base. In addition to that, Salesforce became Oracle’s hardware client for more than 9 years in advance. Oracle is struggling to get the hardware segment going once again, so this is a positive development.

Speaking a lot about customer wins over competition does not promise fantastic results on the report. It seems like some companies are using this tactic to shift the view from the financial results. Oracle did the trash talk in its earnings call back in June. It did not help the stock, which was hit after the announcement of results.

Soft guidance

SAP has cut its full year growth outlook for revenue from software and related services to 10% from prior forecast of 11% - 13%. The company stated that the slowdown in China impacts other countries in the region, and this is reflected in the numbers. Interestingly, SAP did well in Europe, which is a hurdle for many companies across different industries. Another source of headache was the challenging currency environment.

Another tech giant, IBM (NYSE: IBM), has also blamed macroeconomic conditions and the currency environment in its recent quarterly report. As in Oracle’s case, hardware revenue remained weak and was down 12% year-over-year. Software was better, up 4%. The company has stated that it saw a decline in major markets and positive dynamics in growth markets. The company was active on the buyback front, purchasing $3.6 billion worth of its shares. This activity was not very helpful to shareholders, as the stock is up a fraction above the zero line this year.

SAP has a strategy that looks clear. The company is racing to the cloud, and the acquisitions it has previously made are helping this process. SAP is focused. It is difficult to say the same about Oracle and especially IBM. However, all those stocks have been underperformers this year, so SAP’s focus does not translate into meaningful results for shareholders.

Valuation

All three stocks are reasonably cheap. SAP is trading at a 14.25 forward P/E, while IBM is trading at a 10.54 forward P/E and Oracle is trading at a 10.10 forward P/E.

Again, the “cheapness” does not help to lift the stocks as investors are focused on growth. SAP has yet to see the benefits of the cloud, while Oracle and IBM are pressured by hardware. In addition to that, Oracle is facing troubles with its sales force. The company had issued hardware quotas to salespeople specializing in software, and this caused frustration and an outflow of employees.

Neither stock can be treated as an income play. SAP yields 1.10%, while IBM yields 1.96%. Oracle yields only 1.51%, despite the fact it has recently doubled its dividend.

Bottom line

Risks persist. The macro environment and currency headwinds will continue to plague these tech giants. Investors reward growth these days, and this is the thing that would be difficult to extract. I like SAP, but I think the stock could get cheaper before it ultimately gets expensive. Analysts’ mean target price for SAP is $60.26, a 21% downside. Things may not get this bad, but the risk is there. 

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Vladimir Zernov has no position in any stocks mentioned. The Motley Fool owns shares of International Business Machines. and 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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