SAP's Fourth Quarter Was All About S4 Strength; Maintain EUR 131 Fair Value Estimate

After previewing fourth-quarter results on Jan. 14, SAP posted finalized earnings on Jan. 27 that helped provide a better picture of its end-of-year beat that had far surpassed FactSet consensus, while only mildly surpassing our own estimate. As we had expected, finalized results confirmed Sapphire Ventures' hefty contribution in the quarter. While this is discouraging, as the noncore group's success continues to contribute to poor quality earnings, making recent beats a bit misleading, SAP saw nice strength in its core business, as well. SAP's S/4HANA cloud revenue grew by a record-breaking 61% year over year, as the mass cloud migration is well underway. We are maintaining our EUR 131 fair value estimate for narrow-moat SAP, as we continue to believe SAP will benefit from overall health in the ERP market ahead, even while losing overall market share (due to vulnerability in legacy switching costs). Shares are down 6%, which we believe is a result of the market hoping for better near-term profitability. However, we remind investors that the cloud transition is messy, and short-term margin headwinds aren't indicative of long-term profitability. We think SAP is trading in fairly valued territory given our medium uncertainty rating.