SAP SE (SAP)

Equity
Germany
Technology

RISK

RETURN

Key risk factors

Negligible price volatility

Strong & resilient to price shocks

Good trading liquidity

Key return factors

Greatly overvalued vs peers

Good margins and returns

Average growth

Company profileSAP SE, together with its subsidiaries, operates as an enterprise application software company worldwide. The company operates through three segments: Applications, Technology & Support; Qualtrics; and Services. It offers SAP S/4HANA, an ERP suite with intelligent technologies, such as artificial intelligence, machine learning, and advanced analytics; SAP SuccessFactors Human Experience Management provides cloud-based solutions, such as a human resources management system for core HR and payroll, talent management, employee experience management, and people analytics; and intelligent spend management solutions, including products branded under the SAP Ariba, SAP Concur, and SAP Fieldglass names. The company also provides SAP customer experience solutions; SAP Business Technology platform that enables customers and partners to extend and customize SAP applications in a cloud-native way; and SAP Business Network that enable companies to extend their ecosystem, react to supply chain disruptions, discover new trading partners, and find new opportunities. In addition, it offers business process intelligence solutions aim to help customers analyze their operations, understand their process bottlenecks, and improve their business process landscape; Experience solutions; SAP's industry cloud provides modular solutions addressing industry-specific functions; and SAP's ecosystem build, sell, service, and run SAP solutions and technology, as well as sustainable business solutions, services, and partnerships solutions. SAP SE was founded in 1972 and is headquartered in Walldorf, Germany.

Valuation: Greatly overvalued

Multiple

TTM

NTM

P/E

40.10

59.20

PEG

12.30

P/B

4.90

4.50

P/S

6.60

6.20

P/FCF

34.80

35.00

EV/EBITDA

25.20

23.50

From both historical and forecast perspectives, the stock is considerably overpriced compared to similar stocks. In particular, the stock is overpriced on P/E, 'expensive' on EV/EBITDA, and overvalued on P/FCF.

Performance: Mixed

The stock's performance has been mixed in the past six months, with growth following a decline. There is no clear price trend compared to its global peers from the same sector and industry (as shown above). The stock has outperformed this peer group by 21ppts over past six months and grown 6ppts faster in the past month. This is largely true for peers from the same country and sector. With respect to the stock's valuation against its peers, its overall price performance is neutral.

Analyst view: Neutral

The average target price is 219 and suggests 13% upside potential. Usually, this means a HOLD recommendation among investment firms. This neutral recommendation suggests no significant price movement, up or down, in the next 12 months. The most optimistic analyst has a target price of 240.0. This translates into 24% upside potential in the best case. On the other hand, the most pessimistic analyst has a target price of 180.0. This is equivalent to 7% downside potential in the worst case.

Profitability: Good

RoE

SAP SE reported a return on equity (RoE) of 12.1% in the last 12 months, up from 4.9% in FY22. The market consensus projects an RoE of 12.6% in FY24, again behind its peers.

RoA

Another important profitability metric, return on assets (RoA), amounted to 7.4% in the last 12 months, an increase from 2.7% in FY22. The market analysts predict that RoA will be 8.1% in FY24, again weaker than its peers.

RoCE

In the last 12 months, the return on capital employed (RoCE) grew to 9.7%, below the peers. The consensus estimate for FY24 for RoCE is 10.7%, again behind the peers.

Net margin

EBITDA margin

Historically, SAP has reported strong net margins compared to its global peers. Specifically, in the last 12 months, this metric equalled 16.4%, a growth from 6.3% in FY22. The company has reported good EBITDA margins compared to its global peers in recent years. EBITDA margin amounted to 26.1% in the last 12 months, up from 22.2% in FY22.

RoIC / WACC = 1.4(average value creation)

The ratio of return on invested capital (RoIC) to the weighted average cost of capital (WACC) has been 1.4 in the past several years. This ratio implies a average shareholder value creation.

Growth: Average

Revenue

EBITDA

EPS

Free cash flow

SAP reported revenue of EUR 31 808mn in the last 12 months, up 2% from FY23. At the same time, the dynamics of cash flow, as measured by free cash flow (FCF), were drastically different. EPS fell 20% from FY23 to EUR 4.36. Market expects EPS to reach EUR 4.84 in FY24.Revenue has been growing very slowly over the past several years (middle negative), while slow revenue growth and a stable cost base have translated into weak EBITDA growth (negative-to-neutral). This all contributed to very fast EPS growth (strongly positive). The FCF trend is in line with EBITDA. We emphasize the highly volatile dynamics of EPS. On the positive side, revenue dynamics is very stable.

Dividends: Reasonable

Dividend paid

Dividend yield

The company pays dividends most of the time. It has paid dividends in almost every one of the past ten years. Dividend per share (DPS) has grown yearly, but the dynamics are unclear. In the past 12 months, the dividend yield has been moderate and on par with its peers. On average, the company pays dividends annually.

Default risk: Limited

The risk of default is minimal. We note strong positions in its industry, robust profitability, strong debt servicing capacity, solid cash flow generation, and an favourable capital structure, among the positive credit factors. Among the negative credit factors and we point to slow historical revenue growth, and poor working capital management.

Volatility: Negligible

In normal market circumstances, SAP is not volatile. Put differently, without outstanding market volatility or shocking company news, the stock's price will stay within a narrow range. The stock's losses on its worst days (less than 1-5% of the time) will range from very low to negligible.

Stress-test: Negligible

In highly turbulent market conditions, SAP is not volatile. In other words, the stock will fall far less than the index in times of extreme market volatility or shocking company news. Standalone, the worst-day losses (less than 1% of the time) will likely be very low.

Selling difficulty: Low

SAP boasts high trading liquidity. The average private investor can sell his common position in the stock immediately. Liquidity is usually very stable and becomes extremely unfavourable on the days with the lowest activity. However, under highly turbulent market conditions, the trading volume tends to improve significantly.

Country risk: Very low

The institutional, legal, and compliance risks associated with the company's country are minimal. In combination with stringent business standards, shareholder rights are very highly protected.

Other risks: Negligible

No other major risks have been identified.