The WalkMe Acquisition And Cloud ERP Suite Will Improve Future Customer Engagement And Operational Efficiency

Key Takeaways

• SAP's cloud and AI initiatives drive substantial revenue growth by enhancing services, customer engagement, and operational efficiency.
  
• Strategic acquisitions and market transformations enhance user experience, productivity, and revenue potential through expanded solution adoption and ecosystem engagement.
  
• Economic uncertainties, execution risks in large projects, and regulatory scrutiny could hinder SAP's revenue growth and profit margins amid restructuring changes.

Catalysts

Provides applications, technology, and services worldwide.

• SAP's cloud transformation is accelerating, driven by substantial cloud revenue growth, particularly in the Cloud ERP Suite, which saw a 36% increase. This growth is likely to positively impact overall revenue as SAP continues to leverage cloud services in its offerings.
  
• The successful completion of the WalkMe acquisition is expected to improve SAP's workflow execution and user experience, deepening customer engagement and potentially increasing revenue and operating profit margins through enhanced value propositions.
  
• The focus on Business AI has led to significant customer engagement, with about 30% of cloud order entries involving AI use cases. This innovation could drive future revenue increases as more clients adopt AI-enhanced solutions.
  
• SAP's go-to-market strategy transformation aims to enhance operational efficiency through increased partner ecosystem engagement and streamlined job profiles. These measures are likely to improve net margins by boosting productivity and reducing sales costs.
  
• The land-and-expand strategy, specifically targeting mid-market growth and cross-selling opportunities within existing accounts, is positioned to increase revenue through expanded solution adoption and higher consumption rates from current customers.

SAP Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming SAP's revenue will grow by 11.5% annually over the next 3 years.
• Analysts assume that profit margins will increase from 8.3% today to 19.9% in 3 years time.
• Analysts expect earnings to reach €9.2 billion (and earnings per share of €7.94) by about December 2027, up from €2.7 billion today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 34.5x on those 2027 earnings, down from 101.1x today. This future PE is lower than the current PE for the US Software industry at 43.0x.
• Analysts expect the number of shares outstanding to decline by 0.25% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 5.35%, as per the Simply Wall St company report.

SAP Future Earnings Per Share Growth

Risks

• Economic uncertainties and macroeconomic challenges, especially in key markets like Germany, could impact customer spending and delay ERP migration projects, affecting SAP’s future revenues and profit growth.
  
• The scale and complexity of large transformation projects could pose execution risks, potentially leading to increased costs or decreased margins if not managed effectively.
  
• Potential disruption due to ongoing restructuring and go-to-market strategy changes might impact sales productivity, thus affecting SAP's revenue generation and net margins.
  
• Slower-than-expected growth in transactional business and decreases in software license revenue demonstrate areas of vulnerability that could affect SAP's overall revenue mix.
  
• Regulatory scrutiny and investigations, particularly in the U.S. government sector, could pose risks to SAP’s reputation and might impact future earnings from public sector contracts.

Valuation

• The analysts have a consensus price target of €234.42 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 €300.0, and the most bearish reporting a price target of just €146.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be €46.1 billion, earnings will come to €9.2 billion, and it would be trading on a PE ratio of 34.5x, assuming you use a discount rate of 5.4%.
• Given the current share price of €238.6, the analyst's price target of €234.42 is 1.8% lower. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• 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.