Revenue Tops the Charts in SAP’s Q3 as Cloud Drives Top Line; Shares Undervalued

SAP reported mixed third-quarter results, coming in well above our top-line expectations (thanks to stellar cloud growth) while missing our earnings per share forecasts as its venture portfolio underwent significant value decreases. SAP reiterated its guidance for the full year except for free cash flow assumptions, which were lowered slightly. We are maintaining our fair value estimate for SAP at EUR 131 per share as we remain confident in our thesis that SAP will have tougher competition amid mass cloud migrations (meaning increased churn). Yet, for those who remain, we think customer stickiness will be restored and continued scale and mix toward cloud revenues will uplift margins further—driving our model. All in all, our thesis implies that market share losses don’t necessarily impute bleak prospects. Shares are up 6% upon results to near EUR 97 per shar share, though we believe SAP shares are still undervalued.