SAP Earnings: Concur Shows Resilience and Cloud Growth Indicates Firm Demand; Shares Fairly Valued

SAP’s SAP first-quarter results indicated resilience especially within the most vulnerable of units in its transactional businesses (like Concur) holding up well. Results came in above FactSet consensus on the top line, prompting the stock to rise about 6% upon results. Altogether, we are maintaining our fair value estimate of EUR 119 per share, which places the stock in fairly valued territory. SAP shares are up around 30% year to date, which we attribute to the market better grasping the nuanced story SAP has to tell. On one end, SAP is a narrow-moat name that benefits from switching costs as a result of the difficulty in replacing ERP software that is necessary for day-to-day operations. Yet, on the other hand, we think switching costs are vulnerable for the time being as cloud migrations are difficult regardless of whether an enterprise sticks with the same software vendor or not, thus causing reflection on possible vendor changes. Hence, we believe that Workday will surpass SAP ERP market share by fiscal 2032.

SAP’s first-quarter revenue of EUR 7.4 billion marked 9% year-over-year growth in constant currency. Cloud revenue continued to drive results, growing by 22% (in constant currency) in the quarter—boosted by SAP S/HANA revenue, which was up 75% year over year (in constant currency). Transactional revenue held up well in the macroeconomic environment considering it is more discretionary in nature. For example, we were pleased to see Concur revenue grew in double digits year over year, a refreshing recovery from poor performance at the height of the pandemic.

Cloud gross margins continued to be a bright spot for profitability, expanding by 290 basis points year over year in the quarter. Altogether, SAP posted earnings per share of EUR 0.35.