SAP Sees Mixed Q4 as Cloud Margin Gains Can’t Counteract All Weak Spots; Shares Still Attractive

SAP beat our fourth-quarter revenue expectations while missing our earnings estimates. We are lowering our fair value estimate to EUR 119 per share from EUR 131 after cutting our expectations for SAP’s terminal operating margins. Shares are down 1% to near EUR 105 per share, which still leaves ample upside for investors even with our fair value cut. We continue to believe increasing mix in cloud offerings will spark margin expansion in the long run but just to a lesser degree than we previously baked in. As a reminder, we think SAP’s narrow moat is undergoing a negative moat trend as the migration of workloads to the cloud is enabling enterprises to rethink their software vendor. However, we think the market is overestimating the degree to which SAP will be displaced, discounting what we believe to be SAP’s stickiest customers in the supply chain vertical.