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SAP, a market leader in enterprise application software and also one of the largest analytics and business intelligence companies, posted a mixed set of Q1 2022 results, although the most important cloud business continues to clock stable growth.
SAP cloud revenue for Q1 rose approximately 25% year-over-year in consistent monetary terms to approximately 2.82 billion euros (about $ 3 billion), with a slight increase also in growth rate compared to Q4 2021. SAP also said its current cloud backlog stands at 9.73 billion euros ($ 10.5 billion), up 23% year-on-year on the same currency. For the full year, SAP guides that cloud sales will increase by 23% to 26% in constant monetary terms. Overall sales growth was also stable, with total revenue for the quarter rising approximately 11% year-over-year (7% in the same currency) to 7.08 billion euros ($ 7.6 billion), more than estimates. This marks an increase from the approximately 3% growth rates recorded by SAP last year. We believe that the overall capture in revenue growth is encouraging, as the cloud transition typically results in a hit in the growth rate, as upfront software license sales are replaced by subscription revenue and it is possible that SAP will may exceed these temporary issues. However, the adjusted earnings per share fell short of estimates, falling by approximately 28% to 1 euro due to higher R&D and marketing spending, costs associated with Russian business, and lower financial income compared to the past. years from the company’s investments to the venture capital firm. Sapphire
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That said, we think the SAP stock is a good value at the current market price of approximately $ 105 per share. SAP’s cloud transition should give the company a larger mix of repeat sales, with the company now classifying about 81% of its sales as highly unpredictable. Moreover, SAP also estimates that the move should help increase its wallet share among customers, as the cloud-based model effectively integrates software with back-end IT infrastructure and operational services, which businesses typically need to keep on-premise models. Furthermore, as the cloud transition continues, investors are more likely to appreciate SAP as a cloud software company. For perspective, SAP trades at nearly 19x consensus 2022 revenues, compared to cloud-only players like Salesforce stock and ServiceNow stock, which are nearly 40x.
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We value SAP at approximately $ 147 per share, which marks an increase of approximately 40% from the current market price. See our review of Appreciation of SAP: Is SAP Stock expensive or cheap? for more details. For more information on SAP’s business model, key revenue streams, and how its revenues are trending, check out our review on SAP Revenue: How Does SAP Make Money.
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