Cloud Momentum And Alibaba Partnership Will Drive Global Expansion

Key Takeaways

• Surging cloud and AI-driven products, supported by global partnerships and regulatory demand, position SAP for outsized, sustainable growth and expanding high-margin revenue streams.
  
• Efficiency gains and automation are driving margin expansion, with management signaling potential long-term profitability well above current market expectations.
  
• Growing competition, technological shifts, and regulatory demands threaten SAP's core business, pressuring revenue, margins, and long-term market relevance.

Catalysts

Provides enterprise application and business solutions worldwide.

• Analyst consensus expects SAP's cloud momentum to drive double-digit growth in 2025, but with 14 consecutive quarters of over 30 percent growth in Cloud ERP Suite and a swelling cloud backlog at 18 billion euros, the pace of cloud revenue expansion is likely being underestimated, with structural and geographical tailwinds positioning SAP to exceed even bullish revenue growth forecasts in the coming years.
  
• Analyst consensus sees margin upside from efficiency gains and recurring revenue, yet internal adoption of generative AI and process automation is rapidly decoupling expense growth from revenue, with management indicating it can sustain and even accelerate margin expansion, which could push long-term net margins and operating profit far higher than models suggest.
  
• The strategic Alibaba partnership is poised to unlock SAP's next phase of international expansion, providing access to the Chinese enterprise and upper midmarket, paving the way for outsized revenue acceleration, higher international exposure, and new ecosystem monetization well above currently assumed APJ growth rates.
  
• SAP's Business Data Cloud and embedded AI agents are seeing early hypergrowth, with management revealing that add-ons like BDC are already contributing a 20-30 percent uplift to annual contract value on large deals; as the install base migrates and new data products roll out, this creates a powerful high-margin, long-tailed incremental revenue engine likely to structurally boost both revenue and future net margins.
  
• Intensifying global regulatory and defense digitization efforts, particularly in Europe, create a multiyear, high-value demand surge for SAP's compliance, governance, risk, and sovereignty solutions-including in defense and public sector-supporting both resilient top-line growth and recurring high-margin sales insulated from cyclical volatility.

SAP Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more optimistic perspective on SAP compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts.
• The bullish analysts are assuming SAP's revenue will grow by 14.5% annually over the next 3 years.
• The bullish analysts assume that profit margins will increase from 18.2% today to 21.6% in 3 years time.
• The bullish analysts expect earnings to reach €11.6 billion (and earnings per share of €10.0) by about August 2028, up from €6.5 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bullish analyst cohort, the company would need to trade at a PE ratio of 41.3x on those 2028 earnings, down from 45.4x today. This future PE is greater than the current PE for the US Software industry at 30.2x.
• Analysts expect the number of shares outstanding to decline by 0.16% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.33%, as per the Simply Wall St company report.

SAP Future Earnings Per Share Growth

Risks

• The accelerating shift toward modular and API-driven architectures makes large, integrated software suites less attractive, exposing SAP's core ERP business to lower demand and posing a risk to long-term top-line revenue growth.
  
• High integration complexity and associated implementation costs may drive customers to more nimble, cloud-native competitors, resulting in increased customer churn and putting downward pressure on recurring revenues and operating margins.
  
• Intensifying competition from agile SaaS providers such as Workday and Oracle Cloud threatens SAP's ability to retain enterprise customers, potentially eroding market share and constraining future revenue and earnings growth.
  
• The rapid pace of AI and automation adoption in enterprise software may outstrip SAP's innovation cycles, leading to a perception of technological lag and risking long-term relevance, which could translate to reduced revenue growth and net margin compression.
  
• Growing regulatory demands around data privacy and digital sovereignty, particularly in key markets like the EU and US, add ongoing compliance costs and operational complexity for SAP, likely pressuring both net earnings and free cash flow in the long term.

Valuation

• The assumed bullish price target for SAP is €345.0, which is the highest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of SAP's future earnings growth, profit margins and other risk factors from analysts on the bullish end of the spectrum.
  
• 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 bullish analysts, you'd need to believe that by 2028, revenues will be €53.9 billion, earnings will come to €11.6 billion, and it would be trading on a PE ratio of 41.3x, assuming you use a discount rate of 6.3%.
  
• Given the current share price of €254.75, the bullish analyst price target of €345.0 is 26.2% 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.