AI Integration And Cloud Migration Will Unlock Future Opportunity

Key Takeaways

• Driving deeper customer integration and higher recurring revenue through rapid AI adoption and transition to cloud offerings, boosting margin expansion and earnings visibility.
  
• Expanding market reach and topline growth via strategic partnerships, digitalization trends, and internal productivity gains enabling scalable, sustainable profit improvement.
  
• Intensifying global, regulatory, and competitive challenges threaten SAP's growth, margins, and earnings as it navigates costly compliance changes, restructuring, and shifting customer demands.

Catalysts

Provides enterprise application and business solutions worldwide.

• Rapid adoption of SAP's Business AI solutions and generative AI agents is accelerating customer productivity and embedding SAP deeper within client operations, positioning the company to drive higher contract values, increase cross-sell opportunities, and grow annual recurring revenue over time.
  
• Ongoing migration to SAP cloud offerings, especially S/4HANA Cloud and RISE with SAP, is steadily increasing the mix of high-margin, subscription-based revenues-driving margin expansion and elevating earnings visibility for future periods.
  
• The accelerating global push for digital supply chain resilience and business process digitalization is enlarging SAP's addressable market, as evidenced by record cloud backlog, robust new pipeline development (including post-Sapphire event momentum), and consistently strong double-digit growth in cloud ERP.
  
• Deepening strategic partnerships (e.g., Alibaba in China) are unlocking new high-growth markets and lowering customer acquisition costs, setting up SAP for faster geographic expansion and further topline acceleration.
  
• Consistent internal productivity gains-stemming from aggressive implementation of SAP's own AI tools and digital transformation-are enabling expense decoupling from revenue growth, supporting sustainable operating leverage and margin improvement on a multi-year horizon.

SAP Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming SAP's revenue will grow by 12.3% annually over the next 3 years.
• Analysts assume that profit margins will increase from 18.2% today to 20.2% in 3 years time.
• Analysts expect earnings to reach €10.3 billion (and earnings per share of €8.33) by about September 2028, up from €6.5 billion today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as €8.3 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 39.5x on those 2028 earnings, down from 41.2x today. This future PE is greater than the current PE for the US Software industry at 33.2x.
• Analysts expect the number of shares outstanding to decline by 0.12% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.32%, as per the Simply Wall St company report.

SAP Future Earnings Per Share Growth

Risks

• Persistent uncertainty in global trade policy, geopolitical tensions, and elongated sales cycles in sectors like U.S. public sector and manufacturing (due to tariffs and approval delays) could continue to dampen SAP's bookings, resulting in slower revenue growth in affected regions and sectors.
  
• Increased regulatory scrutiny and evolving data sovereignty requirements-especially in the EU and China-may force SAP to make costly infrastructure and product investments to remain compliant, pressuring net margins and limiting operational efficiency.
  
• SAP's ongoing transformation involves frequent restructuring, workforce reduction, and reskilling, yet the need to continually optimize headcount and manage severance costs could generate elevated operating expenses and unpredictable impacts on net earnings if not well-executed.
  
• The shift towards open-source and modular, best-of-breed cloud solutions by enterprises increases competitive pressures from both hyperscalers and more agile rivals, putting SAP at risk of customer attrition, margin compression, and slower long-term recurring revenue growth as customers demand more flexibility.
  
• Complexity in SAP's core products and migration processes (such as S/4HANA and Business Data Cloud), coupled with the slow pace of cloud adoption in its legacy-heavy installed base, may drive higher support costs and longer implementation times, potentially constraining margin expansion and delaying promised earnings growth.

Valuation

• The analysts have a consensus price target of €291.91 for SAP based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of €345.0, and the most bearish reporting a price target of just €192.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be €50.9 billion, earnings will come to €10.3 billion, and it would be trading on a PE ratio of 39.5x, assuming you use a discount rate of 6.3%.
• Given the current share price of €231.35, the analyst price target of €291.91 is 20.7% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.