The database champion and Oracle's nemesis employs 100,000 people worldwide, provides for 300,000 trained consultants, and serves more than half a million enterprise customers.
The departure of Bill McDermott — SAP's charismatic CEO since 2010 — has captured headlines recently. Under his tenure, SAP's market value grew fourfold. Successors are taking over with a lot on their plate.
Based in the U.S., Jennifer Morgan — who spearheaded the push into cloud — will lead the group along with Christian Klein, the Germany-based COO. The duo has been tasked with aligning SAP's financial performance with American peers'. That should prove as hard as it looks.
In effect, revenue growth over the last decade — between 2010 and 2019, sales went from €13bn to €27bn — owes much to McDermott's acquisitions-driven strategy, in particular when SAP had to build up its cloud offering on a tight schedule.
Almost €40bn were spent in takeovers, the vast majority of which in the U.S. The latest move was the dazzling acquisition of Qualtrics, a digital survey specialist bought for €7bn — an eye-popping multiple of 20x revenue. Surely Mr. McDermott saw something others did not.
Shareholders better hope so. Despite revenue growth, operating earnings have disappointed. They increased by only €2.5bn over the 2010-2019 period, leaving many unsatisfied by these poor returns on capital invested. Will margins endlessly suffer from restructuring costs?
Not everything is rotten in the state of SAP. Shareholders know it and push for the best parts to shine. Activist fund Elliott joined protesters as it took a €1.2bn equity stake. Management lent a cooperative ear and immediately went on to launch an ambitious restructuring plan.
The latter already delivers on target. Redundant staff is laid off — "with an iron fist", as promised by McDermott before he left — and the farm has been bet on the cloud, all-in style. It's paying off so far, with subscription rates routinely jumping 30% to 40% from one quarter to the next.
The intent is to emulate the likes of Salesforce, Microsoft or Oracle, which business models perfectly navigated the transition from selling old-fashioned licences to offering a wide range of tailor-made subscription solutions. If they did it, so can SAP.
Management ambitions to reach consolidated revenue of €35bn within three years. All else being equal, this should bring net earnings of about €5.3bn, versus €3.5bn today. Should margin expansion occurs for good, net earnings could hit €6bn or €7bn by that time.
Current market capitalization therefore represents a multiple of 20x to 30x expected earning power by 2023. Cheerful at first glance, this valuation banks on SAP's ability to transform itself and compete head-to-head with its American rivals. Both premises are credible.
In customer relationship management ("CRM"), the German group will have to battle with Salesforce's dominance. Management realistically assets that SAP's excellent reputation in back-end solutions will pave the way for success with its new front-end products.
Finance-wise, acquisitions were funded from free cash-flows and did not undermine the group's fortress balance sheet. Cash keeps piling up at a fast clip, waiting for an "elephant" to be targeted and acquired, for instance in the promising open-source business — like IBM when it took over Red Hat for $34bn.
Microsoft, for its part, has ventured beyond its legacy business applications and cloud solutions to build up an impressive offering in collaborative platforms. After LinkedIn, the Redmond-based giant acquired ubiquitous GitHub for $7.5bn last year.
All in all, transformation is on track and kicking at SAP. Will it succeed? Analysts think so, as shown in their consensus surveyed in real time by MarketScreener — which quantitative ratings regularly highlight SAP's stock as an attractive investment.