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SAP
Shares of the German enterprise software major are trading higher on Wednesday after BofA Global Research analyst Frederic Boulan raised his rating to Buy from Underperform and set a new target of 150 euros ($177) from €92. The stock was trading at around €120 at the time. SAP’s (ticker: SAP) attempt to move customers to cloud-based versions of its core enterprise resource planning software is making traction, according to Boulan.
Financial reporting is usually disrupted when companies switch from perpetual licensing for software operated on corporate data centers to subscription-based applications in the cloud, which often results in slower reported growth rates. In the end, the move improves profit predictability (because to the differences in accounting treatments for subscription and perpetual software licenses), but it usually takes a few bad quarters to get there.
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In a research note, Boulan adds, “Cloud migration is frequently considered as a negative for software stocks.” “However, we argue that the change is beneficial to software companies since it converts lumpy and unpredictable license payments into a regular and larger revenue stream during the client’s lifetime.” SAP’s cloud shift, he believes, will accelerate, eventually transforming the company’s reputation as a software laggard. By 2023, according to Boulan, SAP’s sales and pretax earnings will be in the double digits, “sustaining multiple expansion from sector lows.” According to the analyst, BofA questioned 300 CIOs and found that they showed “strong commitment to SAP,” with “almost none” wanting to leave the company and only 5% not interested in moving to a software-as-a-service model. SAP has lagged the entire market and other technology stocks during the last 12 months, according to the analyst. SAP has lost 6% in that time, while European stocks have gained 26% and rivals have gained 8%.
Oracle
(ORCL) has increased by 49%. He points out that the stock trades at a 20 percent to 50 percent discount to its American and European counterparts. Cloud-based enterprises with similar growth rates are valued at around 29 times anticipated Ebitda in 2023, according to the analyst (earnings before interest, taxes, depreciation, and amortization). According to him, if you use a comparable criteria for SAP’s cloud business, you practically get the rest of the firm for free, including the legacy license business, maintenance, and a controlling ownership in SAP.
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(XM). SAP shares have gained 4% in recent trade in the United States, reaching $147.36. The shares rose 3.5 percent to €124.50 in German trading. Eric J. Savitz can be reached at eric.savitz@barrons.com./n
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