Morningstar | Narrow-Moat SAP Reports Mixed 3Q Results; Maintaining EUR 91 FVE as Shares Appear Fully Valued
Narrow-moat SAP reported mixed third-quarter results that were in line with our expectations but were perhaps disappointing to other investors. On the upside, SAP's earnings beat Street expectations, and the firm raised its full-year revenue guidance range. The company also increased its guidance for cloud subscription and support revenue, modestly ahead of our expectations, although we are still skeptical of the speed at which SAP can transition its customer base from its on-premises offerings to cloud products. On the downside, we believe license revenue, coupled with weaker profit margins, disappointed some investors. We will maintain our fair value estimates for SAP's European shares at EUR 91 and the firm's U.S. ADR at $105. Our assumptions largely credit SAP with achieving its 2020 financial targets. With shares sliding after the results this morning, we see SAP shares as fairly valued. At this juncture, we would orient investors toward undervalued wide-moat names such as Salesforce.com, Microsoft, ServiceNow, or Adobe.On a positive note, we saw solid S/4HANA customer additions as SAP migrates customers to its flagship solution. SAP brought the total amount to 9,500, up from 8,900 last quarter. Second, SAP’s cloud offerings, whether Ariba, Concur, or SuccessFactors were called out for solid performance, giving management confidence in increasing cloud guidance. While we expect Callidus (which SAP bought for $2.4 billion) to be a contributor, we see SAP as a challenger in the CRM space, rather than a leader like Salesforce.
Looking ahead, we model SAP achieving its 2020 financial targets, giving the firm credit for achieving the upper end of its EUR 28 billion-EUR 29 billion revenue targets as well as its EUR 8.2 billion-EUR 8.7 billion cloud subscription and support targets. Yet we believe such targets are more than fully baked into the company's share price, and we would await a wider margin of safety before investing in this name.
SAP is engaged in selling licenses for software solutions and related support services. Co. derives its revenue from fees charged to its customers for the use of its cloud solutions and for licensing of on-premise software products and solutions. Additional sources of revenue are support, professional services, development, training, and other services. Co. has more than 300,000 customers in over 180 countries. Co.'s SAP HANA platform holds the ability to simplify both the user experience and the overall IT landscape, creating a smaller data footprint, increased system throughput, and easier data processing and operation.
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