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Morningstar | SAP Remains Focused on Its Industry Leading ERP Technology

After years of acquisitions, SAP is attempting to unify its cloud strategy. The company has thrown its weight behind its HANA in-memory database technology, creating a closed architecture the firm is hoping to use to lock in existing customers. While this strategy has its risks, SAP remains the world’s dominant enterprise resource planning vendor, and we think many existing customers will be hard-pressed to replace its mission-critical software solutions.ERP includes applications around human capital, accounting, financial, inventory, and supply chain management, among others, and it represents one of the world’s largest software markets (roughly $31 billion in global spending in 2017, according to Gartner). These software solutions are often deeply embedded in the day-to-day processes of SAP’s customers, creating substantial switching costs that underpin our narrow moat rating. SAP has amassed hundreds of thousands of customers, but it has its work cut out for itself as it migrates these customers to the cloud.The firm’s flagship business application suite, S/4HANA, runs exclusively on SAP’s in-memory database technology. While this technology is costly, we believe customers can enjoy as much as 4 times greater performance speeds running applications and processing analytics queries. We believe this technology will suit many of SAP’s customers, though we’re skeptical whether small and medium-size businesses will pay up for HANA. Further, competition from native software-as-a-service vendors such as Workday will keep the pressure on the company to shore up its cloud-based solutions quickly. This won’t come easily, as SAP probably still needs to refine its amalgam of acquired and internally developed technology to ensure reliability, interoperability, and scalability for customers of all sizes.Despite these challenges, SAP has had solid (albeit not overwhelming) success with HANA initially, suggesting customers are finding value in SAP’s latest set of business applications and its database technology. Still, adoption remains in the early innings, and we expect customers will continue to gradually migrate, rather than aggressively flock, to SAP’s new products.