思爱普

SAP's second-quarter results were in line with the company-compiled consensus on revenue but missed on EPS due to higher-than-expected operating costs. However, current cloud backlog growth was strong. Shares were up 3% in after-hours trading.

Why it matters: Second quarter costs were high due to investments in their own AI transformation, notably key hires and increased token costs in research and development. However, this should normalize over the next year given no additional headcount needed and increased token productivity. The pipeline looks good and is set up for a strong second half. Current cloud backlog growth was better than expected at 26% (constant currency) and ahead of cloud revenue growth (24%) for the first time in two quarters, which is a good sign for future growth. Management tone on the call was confident in their ability to meet guidance. However, prudence was maintained due to uncertainty around macro impacts from the conflict in the Middle East. We think a swift de-escalation would likely mean a high possibility of SAP beating full-year guidance.

The bottom line: We maintain our EUR 265 (ADR $317) fair value estimate for wide-moat SAP and view the shares as undervalued. Our estimates are moderately higher than company-compiled consensus on long-term growth. Shares have been heading south for several months, which we see as driven by indiscriminate market angst around the threat of GenAI to all software companies. We think it's highly unlikely that GenAI can displace SAP's deeply entrenched position within its customer operations.

Coming up: SAP's 2026 guidance is for EUR 25.8 billion-EUR 26.2 billion cloud revenue at constant currencies (23%-25% constant currency growth) and EUR 11.8 billion-EUR 12.2 billion EBIT at constant currencies (13%-17% constant currency growth). EBIT guidance was nudged down EUR 100 million at the midpoint due to the dilutive impact of the Dremio and Prior Labs acquisitions, which closed in July.

We lower our SAP fair value estimate to $302 per share from $317 due strictly to currency movements. This fair value implies an enterprise value/EBITDA multiple of 22 times and a P/E ratio of 35 times. We expect low to midteens revenue growth in the near and midterm, fading to high-single digits in the long term. We expect the adjusted EBIT margin to rise throughout our forecast to the low 30s.

We expect near-term revenue growth to be driven by its core cloud ERP offerings, RISE with SAP and GROW with SAP. RISE with SAP targets its installed base of on-premises ERP customers, which is the primary revenue driver. As these customers convert to the cloud, their annual contract value is typically 2-3 times higher versus on-premises maintenance. GROW with SAP targets midmarket customers, an area where the company was previously lacking an attractive product. As GROW with SAP has already proven itself popular with smaller clients with less complex needs, we expect high growth to continue mainly from new customers. Furthermore, as more customers move to the cloud, we expect more cross-selling and upselling of other products to these customers given it's easier to add products in a cloud environment. Overall, we expect cloud growth to remain in the high 20s for the next several years.

We expect the adjusted EBIT margin to have a material step-up in the near term due to the benefits from cost savings in the transformation program. In the longer term, we expect the EBIT margin to incrementally improve each year with the benefits of scale as more revenue shifts to SAP's cloud offerings.

We think SAP has a wide moat based on switching costs across most of its software, particularly core ERP products and the HANA database. Disclosure is limited, but we estimate ERP/HANA-related software is about 75% of total revenue. SAP's return on invested capital has hovered near its cost of capital recently due to heavy cloud investment and restructuring over the last four to five years, but we believe this period is now over, given recent cloud revenue growth and margin improvement. We expect ROIC to rise to a high-teens level by the end of our forecast.

The ERP market is fairly concentrated. According to Gartner, SAP leads with about a 16% share; the top five providers (SAP, Workday, Oracle, UKG, and Sage) control just over half the market. SAP is even stronger in financial management software, with about a 19% share, while the top five (SAP, Oracle, Sage, Workday, Visma) hold roughly 55%. Given how mission-critical financial management software is, we see this as the area with the highest switching costs.

Switching-cost strength for enterprise software typically tracks how mission-critical the software is, customer size, and the number of touchpoints within operations. SAP's ERP sits at the top of all three.

First, ERP is essential, forming the backbone of business processes, covering finance, human resources, procurement, production, and materials management. Via ERP and HANA, SAP centralizes data so departments share a single source of truth, making it mission-critical. Second, SAP serves large enterprises: 98 of the world's 100 largest companies are SAP customers, and 85 use S/4HANA, its core ERP. Third, SAP's broad product portfolio and integration benefits push many customers toward multiple products, adding touchpoints beyond those already created by workflows built on ERP. SAP is also the leading ERP provider for manufacturers, adding further touchpoints as software integrates with physical assets.

Customer retention is the clearest switching-cost signal. SAP doesn't disclose retention (nor does Oracle), so we look to peers Sage and Workday. Sage serves small to midsize businesses mainly for financial management, with 91% gross retention. Given SAP's larger enterprise base and broader touchpoints, we think its retention is likely in the mid-90% range, implying customers stay roughly 20 years. Workday, more focused on HR but also serving large enterprises like SAP, has retention consistently near 98%.

ERP implementations are notoriously costly and slow. For large enterprises, they can cost over $0.5 billion and take five years or longer, requiring expensive integrators (for example, Accenture), while the old system must keep running during testing. That's why many firms still run decade-old ERP. SAP's own maintenance timelines reflect this: in 2020 it announced ending standard ECC maintenance in 2027 (extended to 2030 at higher cost), giving customers a full 10 years' notice. In 2023 it committed to S/4HANA support until at least 2040—evidence customers want roughly 20 years of certainty before switching.

Real-world cases show the difficulty of switching. Lidl began moving to SAP's ERP from its in-house system in 2011, but after seven years and EUR 500 million, scrapped the project since its customizations couldn't be replicated in SAP. Birmingham City Council started shifting from SAP to Oracle in 2019, expecting a GBP 20 million cost and a one-year timeline; six years later, it still lacks a fully functional financial system, costs exceed GBP 100 million, and completion is now targeted for 2026. These cases illustrate the financial cost, disruption, and data migration risk inherent in switching ERP providers.

We'd previously withheld a wide moat rating partly on fears that the cloud shift would trigger a mass customer exodus, as it gave companies a natural reason to reassess providers. SAP's earlier declining share as cloud-native rivals gained ground supported that concern. We now think this risk has faded: SAP's share has stabilized, cloud revenue is growing well above market rates, and the cloud backlog is nearly 4 times the current cloud revenue.

SAP still has a large base on its legacy on-premises ERP, ECC, while its newer S/4HANA is mainly delivered through cloud but also available on-premises. ECC customers drive most of SAP's EUR 11 billion software support revenue. About 25% of that revenue comes from customers already paying cloud fees and maintenance—meaning they've begun their S/4HANA transition. Of the remaining 75%, three-quarters have already committed to S/4HANA in some way (for example, purchased a license), meaning they've evaluated alternatives and chosen SAP. Altogether, roughly 80% of the large-enterprise base has already committed to SAP's new ERP, making a mass exodus highly unlikely.

As customers shift to the cloud, switching costs could strengthen further, since this should be the last major ERP implementation they undertake absent a provider change. SAP's cloud ERP is more standardized ("clean core"), with customization layered on top rather than embedded in the core, enabling continual updates instead of periodic overhauls. As customers benefit from faster innovation and rising satisfaction, switching to a new provider should become an even less appealing prospect.

SAP’s transition to the cloud should drive double-digit revenue growth over the next several years.

With most of SAP’s legacy ERP customers now committed to its new ERP, S/4HANA, the risk of customer loss in the cloud transition is low.

SAP’s new focus on cost efficiency and scaling of its cloud products leaves ample room for margins to improve.

SAP has had challenges with operational efficiency in the past, which have contributed to its having lower margins than some of its major competitors.

On-premises ERP customers can be hesitant to move to the cloud. Ongoing delays may ultimately reduce revenue growth expectations.

SAP's slow shift to the cloud has enabled new cloud-native competitors to enter the market and gain meaningful market share.