SAP's Partnership Potential With Hyperscalers Like Microsoft And Google: Analyst Weighs In

BMO Capital Markets analyst Keith Bachman reiterated the Market Perform rating on SAP SE SAP, raising the price target to $147 from $140.

Bachman notes that SAP introduced Joule, a natural-language GenAI copilot, a few weeks ago, which will be embedded across SAP's cloud enterprise portfolio and deliver proactive and contextualized insights. More broadly, the analyst adds that SAP has a sound strategy in pursuing partnerships with "hyperscalers" such as Microsoft Corporation MSFT and Alphabet Inc. GOOG GOOGL. 

In Q3, SAP reported revenue growth of 4% Y/Y to €7.744 billion. Total revenue was up 9% Y/Y in constant currencies (CC).

SAP reported a solid quarter with consistent growth in cloud backlog, better-than-expected performance in license/maintenance, impressive op margin, and FCF performance, while cloud growth was a touch disappointing, notes the analyst.

The company's solid demand in the cloud is driven by multi-year cloud migration from both net news and conversion in the installed base, helped by the adoption of the RISE/GROW program and scalable BTP.

Bachman writes - that the demand is durable in the near term due to SAP's core position in multiple business processes such as ERP and HR, as well as its sizeable on-prem base yet to migrate to the cloud.

The analyst adds that SAP has shown firm commitments in AI investments, which should provide growth support in the long run, although monetization plans in the near or medium term remain a question. 

The analyst highlights SAP's GenAI features as a catalyst to retain and grow the installed base on the cloud, as AI is only available on the cloud to fully leverage the breadth and depth of data on SAP and external vendors through partnership. 

Price Action: SAP shares are trading lower by 1.77% to $131.01 on the last check Friday.