SAP Earnings: Shares Fairly Valued as Cloud Revenue Growth Offsets Transactional Weakness

We are maintaining our fair value estimate for SAP at EUR 119 per share after the firm reported mixed third-quarter results, with revenue coming in under expectations combined with earnings per share beating our forecast. With the long term in focus, we continue to believe SAP’s otherwise strong switching costs will be restored once the major shift of enterprise workloads to the cloud is concluded. However, we think the firm will experience an uptick in churn over the next 10 years as cloud migrations give way to rethinking software vendors. Still, not all looks bleak for SAP in the years ahead. Even with increased churn, we expect healthy revenue growth over the next 10 years (aided by new software functionalities) along with ample operating margin expansion as cloud profitability improves with scale. Altogether, shares are up 4% upon results, leaving shares fairly valued, in our view.