Is the strategic valuation rerating story at SAP over? No, it has barely begun even though the shares are up 50% from my original €82 recommended buy levels. Why? One, SAP plans to triple cloud revenues to €15 billion on projected total revenues of €35 billion in 2023. SAP’s cloud revenue growth rate is faster than Oracle, Workday and even Salesforce.com. So I believe (ich glaube ja LOL!) it will achieve this milestone. Two, SAP operating margins bottomed in 2018 and will rise 1% per annum till 2023, an invariable precursor to a valuation rerating. Three, SAP has become a serial acquirer of some of Silicon Valley’s most exciting software startups, from Ariba to Concur to Qualtrics and Callidus, spending $44 billion since 2005. Four, SAP’s business model is leveraged to the most exciting frontiers of enterprise software X data, a paradigm shift in business intelligence solutions. There is no doubt in my mind that SAP Qualtrics could boost a $3 billion annual revenue run rate one day – go Provo, Utah!
Five, I entirely agree with Elliot Advisors estimate that SAP can generate €8.50 EPS by 2023. The cloud/X data software revenue momentum and new product offerings (S/4 Hana, Leonardo, Data Analytics) in the software/services core tell me this metric is more than probable. As an investor, I am neurologically programmed to think conditionally, hypothetically and probabilistically. So sometime in 2023, if Mr. Market puts a 30X valuation multiple on SAP, it will trade above €250 in Frankfurt, double from current levels. Just arithmetic and execution duckies.
SAP preannounced third quarter results that were well beyond Wall Street consensus expectations. Revenues were up 13% year on year to €6.79 billion, way ahead of the Street whisper number of €6.68 billion. As significant, cloud revenues were up a blowout 37% to €1.79 billion, making a mockery of skeptics who thought that SAP would be hit by a slowdown in enterprise software spending in Europe and the Asia Pacific.
As Dubai strategic partner in Expo 2020, I am thrilled to learn that SAP has made a strategic commitment to the digital transformation of the UAE and the wider Arab world, with its new S/4 Hana product suite and its embryonic next gen “experience economy” offerings enabled by Bill McDermott’s $8 billion acquisitions of Qualtrics, a game changer in this $300 billion software market segment. SAP outperformed not just on the top but also on the bottom line in 3Q 2019 since non IFRS basis EPS was €1.30, well ahead of Wall Street’s consensus €1.19. In essence, SAP has added 1.5% in operating margin in a single quarter and its cloud revenue growth is 10 points higher than even Salesforce whose valuation multiple is a modest 134X. In retrospect, the 3Q results attest to the success the corporate restructuring program. After all, the stock market valuation of SAP has soared from $39 billion to $156 billion during Mr. McDermott’s decade at SAP.
SAP also announced that Bill McDermott will leave the firm but remain a board member and be succeeded by co-CEO’s Christian Klein and Jennifer Morgan, the first female American woman to be CEO of a global software firm, a thumbs up for international investors in North America. Of course, it does not hurt that Jennifer Morgan has also been the president of the firm’s Cloud Business Group, which includes Qualtrics, SAP Ariba, SAP Customer Experience, SAP Fieldglass, SAP SuccessFactors and SAP Concur. Christian Klein has run product development for SAP’s S/4 Hana, its flagship on premise software solution.
The investment thesis on SAP has been playing out even better than I expected. The strategic $1.2 billion investment by Elliott (Goodfellow?) Advisors, the world’s leading value/activist hedge fund is an incredible vote of confidence in the strategic template of SAP in the next four years. After all, operating margin growth, blowout cloud software revenue growth and a corporate restructuring were the precise triple ballast that triggered Microsoft’s spectacular rerating under Satya Nadella. Mr. Softy shares are up from fivefold since 2014, a fairy tale I have chronicled ad infinitum in my published money rants.
Will something similar happen at SAP now that the firm is turbo-charged by two millennial co-CEOs and, of course, the smartest, coolest GenZ associates in SAP Academy in Silicon Valley’s Sam Ramon. I cannot be objective about the wonderful SAP Academy since one of its current trainees is an actuarial math geekette, my girl twin, the Lady Sophia from MENA South presales. It is anachronistic and even idiotic for SAP to trade at a valuation discount to its global software peers in the Valley and Redmond. So SAP is a no brainer strategic buy for my family and friend portfolio whenever the mood swings of Mr. (Herr?) Market turns from greed to fear. That much, at least, is certain.
Also published on Medium.