Cloud Stocks: What Should SAP Acquire to Triple its Value by 2023?

During the last quarter, ERP giant SAP (NYSE: SAP) has been in the news on account of the large scale restructuring and management reshuffle announcements. Despite the departures, the company continues to invest in cloud, AI, and IoT technologies as it targets to more than double its value by 2023.

SAP’s Financials
SAP’s fourth quarter revenues grew 9% to €7.434 billion (~$8.48 billion), ahead of the market’s estimated $8.28 billion. Overall, the company reported an income of €1.41 (~$1.61) per share. On an adjusted basis, EPS came in at €1.51 (~$1.72), missing the Street’s forecast of $1.78 for the quarter.

By segment, Services revenues grew 11% to €1.108 billion (~$1.26 billion) and Cloud and software business revenues grew 9% to €6.327 billion (~$7.21 billion). Within the Cloud segment, Cloud subscriptions and support revenues grew 40% to €1.413 billion (~$1.61 billion) and Software licenses and support revenues grew 5% to €4.914 billion (~$5.6 billion).

During the quarter, SAP’s new cloud bookings grew 25% to €736 million (~$840 million). It ended the year with backlog for Cloud subscriptions and support segment at €10 billion (~$11.4 billion), up 30% over the year.

SAP continued to see growth for S/4HANA, which saw adoption increase 33% over the year to 10,500 customers. It reported almost 600 additional customers for the service.

SAP ended the year with revenues of $29.18 billion and a profit of $4.82 billion, or $4.04 per share.

For the current year, SAP expects to deliver cloud revenues of €22.4-€22.7 billion (~$25.2-$25.9 billion).

SAP’s Restructuring

SAP announced plans to implement a large-scale restructuring in 2019 and expects to spend €800-€950 million (~ $912-$1,083 million) in the year. This is its first restructuring program since 2015. It expects more of these expenses to be recognized in the first quarter this year. It expects these efforts to drive savings of €750-€850 (~$855-$970 million) million in 2020. Through its restructuring, SAP expects to simplify its structures and processes and ensure that resource allocation is aligned with its strategic priorities to meet evolving customer demands.

Some of the exits on account of the restructuring include names like Executive Board Member and Co-Lead to its Digital Business Services Division Bernd Leukert, President and Executive board member Robert Enslin, Chief Technology Officer and Head of SAP’s cloud platform business Bjoern Goerke.

Analysts expect these savings to be reinvested into the business into initiatives such as IoT, AI, and cloud platforms. Through these initiatives, SAP is looking to treble the size of the cloud business by 2023, bringing total revenues to €35 billion (~ $40 billion).

SAP’s Growth Focus

SAP continued to add several new features for its Cloud, IoT, and AI initiatives to drive the next round of growth. It recently announced enhancements to its Next-Generation Support that integrate machine learning and AI capabilities to deliver incident solution matching and other real-time support services.

Within SAP HANA, it launched several updates including enhanced cloud support, persistent memory support with Intel, intelligent recommendations for efficient database management, new machine learning (ML) capabilities, hyper-converged infrastructure (HCI) certification, and improved cost-effective data tiering and data security enhancements.

It also recently announced that it was expanding new solutions on SAP Analytics Cloud Platform to handle business processes along with offering augmented analytics, cloud-computing, machine-learning, enterprise planning workflows, and data-analysis services. The solution already had analytics capabilities, but the new features will allow users to add new machine learning and artificial intelligent capabilities to existing business intelligence and planning workflows.

Over the past few years, SAP has built a robust platform strategy. Its open PaaS, SAP Cloud Platform, allows organizations to develop, extend, integrate, and deploy mobile-ready cloud applications that can take advantage of an in-memory database, core platform services, and other microservices such as machine learning, blockchain, and IoT capabilities. Developers can leverage its platform to build apps and integrate them with cloud and on-premise applications through API management, smart data integration and open connectors. SAP also operates an app marketplace that currently features a library of more than 1,300 apps developed by its network of third party developers.

SAP has set a high target for itself for the next few years. I think to hit it, it would need to acquire big companies. It could look to add enterprise collaboration players like Atlassian or SmartSheet. Adding Atlassian, for instance, would help SAP add enterprise collaboration and project management tools and give Atlassian a much bigger access to the enterprise segment.

Other interesting acquisitions could be those of Hubspot, Splunk and Zendesk. Hubspot, which last reported revenues of $513 million and a capitalization of $7 billion, would add MarTech capabilities to SAP. Splunk, which is much bigger at $1.8 billion revenues and $19 billion market capitalization could add big data capabilities to its platform.

To compete more closely with Salesforce, a Zendesk acquisition could add CRM skills to SAP. Zendesk ended 2018 with $599 million in revenue and is trading at a market capitalization of $7.8 billion.

Among relatively smaller companies, there is the financial software provider, BlackLine, that has $228 million in revenues and a market capitalization of $2.6 billion. BlackLine already has a strong integration with SAP and an acquisition could help SAP add reconciliation capabilities. Anaplan, with revenues of $240 million and a market capitalization of $4.8 billion could help SAP provide a more flexible cloud-based planning application.

SAP’s stock is trading at a 52-week high of $129.08 with a market capitalization of $158.3 billion. Like other technology stocks, it had fallen to a 52-week low of $94.81 in December last year.

Photo Credit: Paul Downey/Flickr.com

This segment is a part in the series : Cloud Stocks