Sunday, April 30, 2017

A current AIM Fund holding: SAP ADR (SAP) by Jack Gorski. "This German software firm looks strong in 2017 and beyond"

SAP SE ADR (SAP, $97.00): "Potential Cloud Growth Puts SAP Revenues up and into the Sky"
By: Jack Gorski, 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) is a German software corporation that provides enterprise application software to help enhance and manage business operations for their clients. The company focuses on two business segments: The Applications, Technology & Services segment, in which software subscriptions are sold, and the SAP Business Network segment, which encompasses all their cloud, professional and education services.
• SAP can expect to see more customers adopt their SAP S/4 HANA platform now that AMERI Holdings, Inc. has added it to their service, offering it to clients worldwide.
• Cloud revenue growth has proven to be the main driver and executives now have improved their judgement, raising their estimates to revenues of €29 billion by 2020. 
• As of April 20th, SAP has confirmed that 16 startups will begin their one year mentorship at the SAP StartUp Studio in Bangalore, India. Last year only seven startups were accepted.
• Management was recently restructured to encourage more strength within the company. Jennifer Morgan and Adaire Fox-Martin have been named to the executive board.

Key points: Cloud services are growing faster than expectations and are now the lead driver for revenue growth moving forward into 2017. SAP is currently the number one enterprise cloud company with 95 million users and growing. YoY Cloud Subscription and Support Revenue is up 31% to €3.01 billion. SAP has raised their 2017 forecasts, now projecting sales of €23.5 billion. They stated the new internet based software and services provides a more predictable revenue stream over the tradition software licenses.

Management has also expressed confidence in the customer adoption of S/4 HANA. HANA has generated €4.0 billion in license and maintenance revenue since its launch. Revenues are expected to grow now that AMERI Holdings, Inc. will now be offering the platform to its clients worldwide. S/4 HANA has already doubled used YoY with nearly 1,300 new customers in Q4 2016, of which 30% are new SAP customers.

At the SAP Capital Markets Day on February 9th, management displayed some confidence that while margins might shrink in 2017, this year will represent the margin trough and thus margins should expect to grow in 2018. SAP is now offering a hybrid licensing model that is now offering a more subscription based service, rather than charging an upfront fee. The new payment structure produced a Q4 2016 operating margin of 35.9 percent. The decision of how customers choose to pay will have a major effect on margins moving forward.

What has the stock done lately?
SAP has seen a 10.45% increase in Q1 2017. This increase can possibly be attributed to higher expected cloud growth and more S/4 HANA subscriptions. Since their Capital Markets Day on February 9th, the stock is up over $5.00. Relatively Q1 2017 has shown stable growth, as rising prices reflect investor confidence in the growth of cloud based revenues, despite flat expected organic licenses growth.

Past Year Performance: SAP has increase 27.86% over the past year, but still has potential to grow. Despite ups and downs from different like Brexit, still managed to outperform major indices for the second year in a row. Additionally, they performed well against their major competitors, and are still trading with a price to earnings multiple lower than the average of its comps.

Source: FactSet

My Takeaway
SAP has massive potential to increase their customer base with the rollout of their S/4 HANA platform. With assistance from AMERI Holdings, Inc. SAP can expect high subscription revenue growth in FY 2017 and FY 2018. Despite lack of certainty of margins due to changes in payment methods, SAP is positioned nicely to expand revenue in the years to come. Establishing itself as the number one enterprise cloud based provider worldwide, 

SAP has certainly produced a large moat, separating it from its competitors. With strong business model and newly structured management force, SAP is likely going to see massive success and continue to push its stock to all-time highs.

Source: FactSet


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