Thursday, April 23, 2020

An AIM International Equity holding: SAP SE ADR (SAP, $116.00): “ The Signs Are Positive” by: Riley Arnold, AIM student at Marquette University. Big tech is looking fine...

SAP SE Sponsored ADR (SAP, $116.00): “ The Signs Are Positive”
By: Riley Arnold, AIM Student at Marquette University

SAP Co-Chief Executive Officer Christian Klein Continues as CEO ...

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 the market leader in enterprise application software and experience management, analytics, and business intelligence company with operations in more than 150 countries.
·       SAP has recently made changes to their management, shifting the executive structure from a co-CEO model to a sole-CEO model under Christian Klein’s leadership. The COVID-19 outbreak has called for swift action, and SAP has outlined this measure among several others to combat its effects.

·   Though SAP has been negatively affected by the virus, the company plans to further push its S/4HANA platform and improve margins through 2023. The company also trimmed its guidance, with outlooks readjusted anywhere from 75-200 bps to adjust for decreased demand during the pandemic. Business is expected to rebound in later 2020 or early 2021 to maintain company growth.

Key Points:
On April 20th, 2020, SAP announced the departure of Co-CEO Jennifer Morgan with the aim of transitioning SAP’s leadership structure from a co-CEO to sole-CEO model. Christian Klein, the other co-CEO of SAP that was appointed in October 2019 along with Morgan, is still in place to remain head of SAP in wake of the pandemic. This restructuring appears to be part of SAP’s reaction to COVID-19, as the company emphasized a deep need for a very clear leadership structure that would be able to take swift action to maintain company operations as the uncertainty of the outbreak continues.

To help their business partners and other companies combat the negative impacts of the pandemic, SAP has implemented new policies regarding access to their software and other business programs. In light of COVID-19, SAP is offering free access to Remote Work Pulse by Qualtrics, SAP Ariba Discovery, and other programs to help ease the supply chain disruptions and fragmentation felt by companies in several industries. For their own employees, SAP has mandated working from home and reduction of discretionary spending to attempt to maintain company margins.

SAP was added to the AIM International Equity portfolio in late September 2019 with a proposed price target of $151.85 behind the incorporation of the new S/4HANA product, greater emphasis on the cloud and cloud-based programs, and a margin improvement program. Since incorporation, the stock performed well before the full impacts of COVID-19 were realized. SAP was one of the first technology companies that provided an updated guidance to FY 2020 operations, with slight decreases in company growth due to decreased demand and business volume. The company expects this demand and volume to uptick in later 2020 after the pandemic swell calms down.

What has the stock done lately?
The impacts of COVID-19 have not helped SAP, as its share price steeply dropped from its $139 peak to below $95, mirroring the movement of the AIM International Portfolio benchmark, ACWX. Once the initial panic of COVID-19 was overcome, SAP’s share price has begun recovering and has already surpassed where they were a year ago. While the uncertainty for the pandemic’s full impact continues to rise, the market and Wall Street are confident in SAP’s ability to overcome the virus’s effects and continue to boast strong growth relative to the industry.

Past Year Performance:
In a 52-week window, SAP’s price has only increased 1.66%. However, given the impact of COVID and its long list of operational disruptions, this slight price increase is significantly better than the benchmark, which posted returns reaching almost -30% over the same time period. The company’s P/E ratio spiked in early 2019, peaking at around 45.8 in June and coming back down to around 37 in the current market.

My Takeaway
As a recent addition to the AIM portfolio, SAP still has most of its 3-5 year time horizon to grow and generate returns for the program. The company, through its S/4HANA product and swift leadership actions, has shown it is not afraid to adapt its business to any given conditions. With the cost-saving program not concluding until 2023, SAP’s margins will continue to improve and help the company capitalize on the accelerated growth it has experienced in years past. Though productivity and overall operations have decreased during the quarter, the chance of further downturn in SAP’s operations is slim to none. Given their strong product portfolio and even-keeled management, it is recommended that the program hold SAP to generate greater long-term returns and see the company through the wake of the COVID-19 outbreak.