SAP Shares Attractive After Earnings Miss From Noncore Sapphire Ventures; Maintaining EUR 131 FVE

SAP reported mixed first-quarter results, as revenue nicely topped our expectations due to strength in cloud while earnings disappointed and fell below our forecast. Guidance for the year ahead remained the same. Considering even-keeled guidance and the mixed quarter, we are maintaining our fair value estimate of EUR 131 per share ($141 for U.S. ADR shares upon exchange rate changes) for this narrow-moat name. Prompted by the bottom-line miss, shares are down 2% upon results. Nonetheless, the earnings miss was largely due to a tough compare for SAP's noncore business, Sapphire Ventures. This makes the miss less concerning in our view, given it was less related to SAP's core business. Altogether, we think now is an attractive time to invest in SAP stock. While we rate SAP's narrow moat as having a negative moat trend due to vulnerable switching costs amid mass migrations of ERP systems to the cloud, we think that SAP will still be able to grow its top line on an absolute basis (despite falling ERP market share to come) while also seeing nice margin expansion from the existing client base remaining on SAP software after cloud migration. We do not think the market is properly factoring in this more nuanced take of this ERP legacy giant.