Not Every Tech Stocks are Equally Strong: SAP
SAP stocks have lost 30% since the beginning of 2022. The German tech company develops enterprise software and solutions to manage business operations. For example, one of its services can be used to manage all business travel financial activities and related spending. In other words, it is quite a routine company with a stable and strong cash flow. Once SAP software is installed on a corporate level it is hard to do without it as it is deeply integrated into the business core processes. Moreover, SAP is restructuring its business model around its subscription base and this will allow for cash flows to be even more predictable and balanced through the financial year. Such a model is in favourable to Wall Streel investors.
The war in Ukraine has a 300-million-euro negative effect on SAP business, and it is only a marginal 1% of the overall revenue base for the company, while its dominance in the ERP segment is secure. The revenues added 11% year-on-year to 7.08 euros in Q1 2022. The revenues grew by 6% in Q4 2021.
The company has made some successful M&A deals, acquiring Qualtrics, a cloud-based subscription software platform, that delivered +48% revenue in Q1 2022. This company had a gross margin above 90% in 2021 while SAP’s gross margin was at 70% for the same year.
SAP management promised to triple its cloud-based business by 2025, and boost revenues to 22 billion euros, while operational profit is forecasted to grow by 40% from the current 8.4 billion euros. This is a very extensive growth for the company that has a high P/E ratio at 17. The company may not perform very high growth rates as its younger tech sector peers, but it may certainly recover to new all-time highs in the long-term perspective. However, the sector may require several quarters to recover, and the recovery would be headed by such reliable companies as SAP with a low risk profile.