SAP Stock Surges 37% Year to Date: Will the Rally Continue?

SAP SE's SAP stock is continuing its upward trajectory, with a gain of 36.7% in the year to date compared with 13.3% and 6.2% growth of the S&P 500 composite and the sub-industry, respectively.

The company is currently trading at a nearly 4.5% discount to its 52-week high of $221.24, reached on Aug. 29, 2024. This pullback from the recent peak might offer a strategic buying opportunity for investors looking to capitalize on potential gains.

With healthy fundamentals and strong growth opportunities, this Zacks Rank #2 (Buy) stock appears to be a solid investment option at the moment.

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Apart from a favorable rank, SAP has a VGM Score of B. Per Zacks' proprietary methodology, stocks with a combination of a Zacks Rank #1 (Strong Buy) or 2 and Growth Score of A or B offer solid investment opportunities.

SAP's Thriving Cloud Business

SAP has been concentrating on expanding its cloud business to become one of the leading players in the category. In the last reported quarter, the current cloud backlog — a key indicator of go-to-market success in cloud business — soared 28% (both at nominal and cc basis) to €14.8 billion.

Increasing demand for Rise with SAP solution remains the biggest driver. This solution helps companies transform its business processes and operations to become more nimble, digital and intelligent. SAP solution continues to gain significant traction and will aid the company in driving its market share in the cloud ERP solutions space.

Rise with SAP will also help the company boost the uptake of its SAP S/4HANA solution by providing its customers with more options for implementation and support from certified partners. Momentum in other cloud offerings like Grow with SAP and SAP Datasphere, as well as strategic acquisitions and collaborations, bodes well for its cloud business.

In the second quarter of 2024, SAP's cloud revenues were €4.15 billion, up 25% year over year on a non-IFRS basis (nominal and cc). The uptick resulted from notable 33% growth in Cloud ERP Suite revenues, highlighting the effectiveness of SAP's Software-as-a-Service (SaaS) and Platform-as-a-Service (PaaS) solutions.

SAP's cloud business strength was prominent across India, Japan, South Korea, Germany, Brazil and Canada. This business strength also remained strong in the United States, Saudi Arabia and China.

SAP's Robust Outlook for Cloud Business

Given the strong momentum in the cloud business, management anticipates 2024 cloud revenues in the range of €17-€17.3 billion, which indicates an increase of 24-27% at cc on a year-over-year basis. Cloud and software revenues are expected to be between €29 billion and €29.5 billion, respectively, which implies 8-10% growth at cc on a year-over-year basis.
SAP expects cloud revenues of more than €21.5 billion and total revenues of more than €37.5 billion for 2025.

SAP Focused on Generative AI

SAP remains optimistic about the generative AI trend. In April 2024, SAP announced significant advancements in AI for supply chain solutions, aiming to redefine productivity and efficiency in manufacturing sectors. The company announced a collaboration with IBM and Amazon Web Services to make strides in GenAI capabilities and unlock potential business opportunities.

Management announced that it would focus on vital strategic growth areas, especially Business AI and position the company for growth, earlier in 2024. SAP intensified its restructuring efforts, expecting total expenses of roughly €3 billion. This initiative is crucial for aligning SAP's workforce and resources with long-term business strategies.

Nonetheless, softness in the Software license and support business segment coupled with global macroeconomic weakness are concerning. Increasing costs and stiff competition in the cloud space are additional headwinds.

SAP's Estimates Northbound

The Zacks Consensus Estimate for SAP's 2024 and 2025 revenues is pegged at $36.7 billion and $40.6 billion, respectively, which indicates growth of 8.8% and 10.6% from the year-ago levels.

The consensus estimate for 2024 EPS is pegged at $4.83. For 2025 EPS, the consensus estimate is anticipated at $6.33, implying a rise of 31.2 % from the prior-year actual.

The Zacks Consensus Estimate for 2024 and 2025 EPS has increased 5% and 3.3%, respectively, in the past 60 days, reflecting analysts' optimism.

Other Stocks to Consider

Some other top-ranked stocks worth consideration in the broader technology space are Manhattan Associates MANH, Adobe ADBE and ANSYS ANSS. While Manhattan Associates sports a Zacks Rank #1, Adobe and ANSYS carry a Zacks Rank #2 each, at present.

The Zacks Consensus Estimate for Adobe's fiscal 2024 EPS is pegged at $18.16, unchanged in the past 30 days. ADBE's earnings beat the Zacks Consensus Estimate in each of the trailing four quarters, the average surprise being 2.7%. The long-term earnings growth rate is 13%. Its shares have declined 0.2% in the past year.

The Zacks Consensus Estimate for ANSS' 2024 earnings is pegged at $9.96, unchanged in the past 30 days. ANSS' earnings beat the Zacks Consensus Estimate in three of the last four quarters while missing the mark once, with the average surprise being 4.8%. Its shares have declined 3.2% in the past year.

The Zacks Consensus Estimate for MANH's 2024 EPS is pegged at $4.26, unchanged in the past 30 days. MANH's earnings beat the Zacks Consensus Estimate in each of the last four quarters, with the average surprise being 26.6%. The stock has surged 23.4% in the past year.

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