Blog: You, us, everyone

Introduction:
The technology company SAP is based in Walldorf, Germany, and operates in more than 130 countries, across all 5 continents. SAP is one of the largest enterprise resource planning (ERP) companies in the world - the leader in the field.  Its “on-premise” applications generate more than 90% of its revenues, and its ERP business share is twice as big as Oracle, the next biggest competitor.

SAP’s operating results are mainly generated through “Maintenance and support”, this activity is sold at attractive profit margins and contracts run for a long time.In recent years, the company has made a number of timid acquisitions with the aim of entering the cloud business. The same strategy is being pursued by Oracle, although more rigorously. SAP could start to feel the heat as Oracle targets lesser established, but faster growing cloud providers. 

Historically, SAP has made the right capital allocations, focused on the right risk and compliance issues, driven growth both organically and through acquisitions, and recently started paying dividends; however, the company needs to change its pace to keep up with the rapidly growing cloud market. Given there is little public knowledge of a strategy to eventually address this issue, the share appears to be overvalued at its present price level (€60).

Strengths and weaknesses analysis / Fundamental analysis 
Strengths:

• Through recent acquisitions, SAP has started to gather the low hanging fruit of the cloud business. In this segment, the company is expected to earn about €800 million in revenues in 2013,
• SAP’s core business is ring-fenced with long-term contracts, giving SAP sufficient leeway to adapt slowly and in a prudent manner to new business conditions,
• SAP’s newest platform and database technology, SAP HANA, (and related products) is expected to be the next growth driver for the company,
• The company is set to benefit from strong enterprise IT spending until 2016,
• High recurring revenues give SAP strong top-line visibility.

Weaknesses:

• Historically SAP has lagged behind the competition in a) developing and implementing new technologies, and b) defining new software solutions,
• Smaller competitors are successful in poaching SAP’s smaller customers. Ongoing customer losses will reduce the company’s growth opportunities and operating metrics will suffer,
• Due to strong competition, growth outside its core business (ERP) will come with lower operating margins than in past years,
• Historically, SAP stocks have been traded with a premium of about 25% compared with the peer-group. Given the outlook, the stock may underperform for some time,
• Recent acquisitions (including SuccessFactors and Ariba) were financed through debt arrangements. At present the company has about €4.4 billion in outstanding debts, this is unusually high for a software service company,
• The acquisition of Hybris allows provides the reduction of some synergies, however the expensive take-over does by no means offer SAP a quantum jump.

Investment opportunity / Portfolio management 
Operational risks: Medium to high 
Expected growth: Below average
Investment orientation:   Group “Best-in-Class” investment theme: Technology II 

Abbreviations:
ERP: Enterprise resource planning (management and allocation of available resources (financial and other company resources)