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Morningstar | SAP Announces $8 Billion Deal for Qualtrics Just Before the Firm’s IPO; $105 FVE Maintained

SAP has agreed to acquire Qualtrics for about $8 billion, and we are maintaining our EUR 91 fair value estimate and $105 per ADR fair value estimate. According to PitchBook, Qualtrics had raised $180 million in a series C round, which put the firm’s valuation near $2.5 billion back in 2017. The deal comes just before Qualtrics going public and equates to about 20 times Qualtrics’ forward sales, a relatively hefty multiple, in our opinion, but in line with other blockbuster software deals since the start of 2018, including Salesforce buying MuleSoft (about 21 times forward revenue) and Microsoft buying GitHub (about 24.5 times forward revenue). Qualtrics expects revenue of about $400 million this upcoming year and recorded a profit margin of about 0.8%. The deal is SAP’s second-largest after the $8.3 billion purchase of Concur, and SAP already underwent a relatively large deal earlier this year, with the $2.3 billion purchase of Callidus Software. Before the Qualtrics deal, we had long thought SAP’s valuation was getting pricey, and as SAP’s stock has come back down, we see the name as fairly valued today.

Qualtrics began as an online research tool but has since become an enterprise feedback management platform for both customer and employee feedback. We believe that as the customer experience becomes increasingly vital to enterprises, companies need a cohesive view of their customer as industries become more competitive. We believe experience management is becoming a nondiscretionary spending item and expect Qualtrics to benefit from secular CRM tailwinds.

SAP’s goal is that it can leverage Qualtrics’ technology to expand in the CRM market. We note that SAP aims to use its salesforce to accelerate the growth of Qualtrics. While we think there are opportunities to cross-sell to SAP’s current clients, Qualtrics needs to experience sustained growth over the next few years to justify the lofty acquisition price.

We see a couple factors as positives for the SAP acquisition. First, Qualtrics has a number of attractive metrics, such as 9,000 total customers, 75% of Fortune 100 companies, and 600-plus customers with over $100,000 subscription annualized contract value. Second, we expect Qualtrics to benefit from CRM tailwinds, since CRM spending in aggregate was $36 billion in 2016, that number is estimated to expand to $79 billion in 2022, according to Gartner. Third, we have assigned moats to other "voice of the customer" competitors, such as Nice, which we awarded a narrow moat rating. Thus, it remains possible that Qualtrics would possess a narrow economic moat as well.

We plan on closely following SAP and Qualtrics targets over the next few quarters to ensure the company can hit its long-term metrics. While we believe there are synergies in Qualtrics' ability to use SAP’s salesforce and that CRM spending is a nice tailwind for the business, the relatively expensive multiple largely cancels out some of the benefits of the deal. If SAP can help accelerate Qualtrics' revenue growth and SAP can use Qualtrics' tools to cross-sell its legacy and cloud products, we believe that it begins to justify the deal. Going ahead, we continue modeling near SAP’s cloud revenue targets for fiscal 2020.