Investing.com – In a research note published on Wednesday, Argus analysts announced an upgrade of SAP SE ADR (NYSE:) to a ‘Buy’ rating, setting a new price target of $240.
In the second quarter of 2024, SAP showed a significant 35% increase in pro forma operating income and a 10% increase in revenue, while pro forma earnings per share saw a remarkable 60% increase.
Argus analysts highlight SAP’s evolving business strategy, which is shifting focus to cloud services as traditional licensing activities decline. AI applications and business transformation initiatives are important facets of this new direction.
Although Argus has lowered its 2024 EPS estimate from $5.61 to $5.34, it maintains its 2025 forecast at $6.78. This adjustment is attributed to accounting changes related to the Qualtrics spin-off and currency fluctuations, and not to operating performance.
Investment thesis
Argus believes that SAP has successfully transitioned its business model, leveraging cloud-based revenue and improving margins, despite the decline in on-premise software licenses. The company is optimistic about SAP’s ability to capitalize on digital transformation and cloud migration trends among its enterprise customers. Significant restructuring initiatives are also expected to further improve margins.
SAP’s goal is to improve customer experiences through digital transformation, of which AI is a crucial component. The company’s S/4 HANA Cloud system, combined with various business process applications, only supports cloud or hybrid solutions. This versatility is expected to appeal to a wide range of business customers.
Argus notes that SAP shares have become more valuable in 2024 due to strong operating returns, with the expectation that this trend will continue in 2025.
Recent developments
On July 22, SAP reported results for the second quarter of 2024. Revenue rose 10% year-on-year to 8.3 billion euros, thanks to a 25% increase in cloud sales. However, the increase was offset by a 28% decline in software licenses and a 3% decline in software support. In total, the software licensing and support segment fell by 5% to 3 billion euros, while service revenue increased by 6% to 1.1 billion euros. Pro forma operating profit increased 35% at constant exchange rates, improving operating margin by 410 basis points to 23.4%.
Pro forma diluted earnings per share attributable to SAP increased by 60% year-on-year to 1.08 euros. Based on International Financial Reporting Standards (IFRS), SAP’s earnings per share from continuing operations rose to EUR 0.75 from EUR 0.62 in the same quarter of the previous year. SAP incurred restructuring costs of 2.9 billion euros in the first half of 2024, including 600 million euros in the second quarter as part of its business transformation initiatives.
The current cloud backlog amounted to €14.8 billion at the end of Q2 2024, up 28% year-on-year, indicating a strong near-term revenue pipeline despite the decline in on-premises software licenses.
SAP also actively pursues growth through acquisitions and new product launches. On June 5, the company agreed to acquire WalkMe Ltd. for approximately $1.5 billion. WalkMe’s digital adoption platform improves digital workflows and SAP expects the acquisition to close in the third quarter of 2024. In addition, SAP launched Joule, an AI co-pilot tool, with integration into its cloud enterprise portfolio.
Profit and growth analysis
Argus revised its 2024 EPS estimate for SAP from $5.61 to $5.34, but maintained its 2025 forecast at $6.78. Earnings growth is expected to be 13.5% over the next two years, significantly above the long-term growth rate of 6%.
SAP has ambitious goals to generate over €37.5 billion in revenue and €10 billion in pro forma operating profit by 2025, leveraging substantial investments in AI and business transformation.
Financial strength and dividends
SAP’s financial strength is rated “High” by Argus, supported by strong credit ratings from S&P and Moody’s (NYSE:). SAP paid an annual dividend of $2.39 per share in May 2024, with projections for a slight increase to $2.52 in 2025. The current dividend yield is approximately 1.1%.
Valuation
SAP shares have outperformed the major indices, gaining 34% year-to-date, compared to a 25% gain for the S&P 500. The forward enterprise value/EBITDA multiple of 23.5 is 17 % above the comparable average.
Argus has upgraded its rating on SAP to ‘Buy’, with a target price of $240, based on the company’s promising transition and growth prospects in cloud computing and AI.
