Saturday, February 18, 2017

An AIM International Fund: SAP (SAP) by Yiqiu (Ethan) Zhu. “IoT is not a SAP story"

SAP SE (SAP, $92.52): “A Heavy Truck That Is Gaining Momentum”
By: Yiqiu Zhu, AIM Student at Marquette University

Disclosure: The AIM Equity Fund currently holds this position. This article was written by myself, and it expresses my own opinions. I am not receiving compensation for it and I have no business relationship with any company whose stock is mentioned in this article.

SAP SE (NYSE:SAP) provides organization with business application, analytics software, and enterprise cloud service. The company is known for its Enterprise Resource Planning (REP) products and about 70% of company’s revenue comes from this segment. The rest is come from cloud service.  
• In FY 2016, the company has excellent performance and the company rise its outlook for FY 2017

• SAP S/4HANA had very positive market reaction in FY 2016 and its customer base doubled in FY 2016.

• With IoT market continuously growing bigger, the company will soon see return from its investments in IoT products.  

Key points: On January 24th 2017, SAP announced it annual report for FY 2016 and fourth quarter 2016. Both report have shown excellent result for SAP.

In FY 2016, SAP’s operating profit and total cloud and software revenue successfully surpass its full year outlook raised in October. The company experienced a 7% growth in cloud and software revenue, which initially does not seem like an impressive growth rate for entire year. However, the fourth quarter report truly shows that SAP is gaining more growth momentum. 

The Cloud subscriptions and support revenue grew 31% year-over-year to €827 million. New cloud bookings were up 40% in the fourth quarter and reached €483 million. The cloud subscriptions and support backlog, which is a strong indicator for strong cloud growth, increased 47%. All these financial results have indicate strong potential growth for SAP. Therefore, SAP decide to raise its outlook for 2017.

SAP S/4HANA is a milestone for SAP, it marks the company’s transition from onsite software system to a cloud system. The market reaction of the SAP S/4HANA system in 2015 is positive and the system gain more traction in 2016. S/4HANA’s customer base reached 5400 in FY 2016, which is doubled compare to FY 2015. And 30% of these customers are new customers. Overall, the S/4HANA system has strong growth potential in the future.

Finally, SAP has been heavily invested in IoT products for FY 2015 and FY 2016, and with IoT market continuously growing in recently years, the company expects its IoT product, SAP IoT, to start yielding profit in mid-2017.  

What has the stock done lately?
Since the addition of SAP into the AIM international fund on October 17th 2016, the company’s stock has performed quite well. The stock price rose from the purchase price of $86.26 to $92.52 on February 3rd 2017. The stock dropped to $81.61 on November 14th 2016, but soon started to rise all the way to $92.52 due to positive 4Q results and annual report.    

Past Year Performance: SAP has increased 18.2% over the past year. The stock is currently at its all-time high. Based on SAP’s 1 year price chart, it seems like the market is testing if the stock has the potential to break $93 mark because the stock had reached $92.36 on September 22nd 2016. And now, the stock has reach this point again. If SAP could break the $93 mark, it will have strong potential to grow even higher.

  Source: FactSet

My Takeaway
In my opinion, SAP is a very solid company that is worth holding for next couple years. The company’s newest cloud based product SAP S/4HANA’s customer base still has strong growth potential for FY 2017 and FY 2018, which will also help SAP to boost its cloud service revenue.  In addition, the company will also enjoy the return from its IoT products within next couple years. With all these strong upside for SAP, I believe the company will have the potential to break $100 per share.


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  2. Excellent article here. This is one of the most fascinating articles that I've read in my life. Everything on this article is just perfect and in the right place. I couldn't have asked for a better article than this. sap cloud erp