SAP Skyrockets 65% YTD: How Should Investors Play the Stock?

SAP SE SAP stock has had a good run on the trading front this year, with a year-to-date gain of 65.3%, outpacing its sub-industry, Zacks Computer and Technology sector and the S&P 500 composite’s growth of 22.1%, 32.4% and 27.8%, respectively. Pivot to cloud has been the driving force behind SAP stock’s good run.YTD Price PerformanceImage Source: Zacks Investment ResearchHeadquartered in Walldorf, Germany, SAP is one of the largest independent software vendors in the world and the leading provider of enterprise resource planning (ERP) software.SAP stock closed the last trading session at $255.54, after reaching a new 52-week high of $256.13. Investors are now most likely contemplating whether to stay invested or cash out. Let us dive into SAP’s prospects and determine the best course of action for your portfolio.Cloud Momentum to Buoy SAP’s PerformanceSAP has been focusing on expanding its cloud business to gain a higher share of the lucrative cloud market. Higher adoption of Rise with SAP solution remains the biggest driver. This solution helps companies transform their business processes and operations to become more nimble, digital and intelligent. This 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 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. 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 also plans to expand its reach into the mid-market with a stronger emphasis on partner ecosystems. By empowering partners to target mid-market businesses, SAP can tap into a highly profitable sales channel that has previously been underutilized.Current cloud backlog, a key indicator of go-to-market success in cloud business, surged 25% (up 29% at cc) to €15.38 billion in the third quarter. In the quarter, SAP’s cloud revenue growth was a key highlight, underlining its strong position in the global cloud market. Cloud revenues surged 25% to €4.35 billion. The key growth driver was the Cloud ERP Suite, which contributed significantly to the overall cloud revenue growth. The 34% rise in Cloud ERP Suite revenues was a result of SAP’s focus on providing advanced, scalable solutions for enterprise resource planning in the cloud.SAP Raises OutlookGiven the strong momentum in the cloud business, management has raised the outlook for 2024. For 2024, management anticipates cloud and software revenues in the range of €29.5-€29.8 billion, indicating an increase of 10-11% at constant currency (cc) on a year-over-year basis, elevating the midpoint by €400 million. The prior view was €29-€29.5 billion at cc. It now expects 2024 non-IFRS operating profit in the range of €7.8-€8 billion, indicating a rise of 20-23% at cc on a year-over-year basis, raising the midpoint by €150 million. The prior view was €7.6-€7.9 billion at cc. Free cash flow is now estimated in the €3.5-€4 billion band. Prior view was nearly €3.5 billion.Strategic AI Investments Bode Well for SAPSAP is focused on integrating AI across its product suite as the company expects business AI to play a key role in driving cloud ERP suite revenues. In the third quarter, SAP highlighted that around 30% of the cloud order entries included AI use cases.Management highlighted that it has incorporated more than 500 skills into the company’s AI co-pilot Joule and is progressing to cover 80% of the business and analytical transactions by the end of 2024. In September 2024, SAP concluded the buyout of Israel-based WalkMe for $1.5 billion. Embedding WalkMe’s adoption capabilities with SAP’s copilot Joule will strengthen AI assistance and productivity for SAP customers.Earlier in 2024, the company had announced that SAP would be taking up a restructuring program to boost investment in business AI (which is likely to conclude in 2025), which is expected to impact 9,000 to 10,000 positions across its operations. So far, the restructuring has resulted in expenses totaling €2.8 billion in the first nine months of 2024 with an overall estimate of €3 billion in associated costs. Restructuring payouts in the third quarter amounted to €0.3 billion, bringing the year-to-date total to €0.8 billion.Weakness in Software License BusinessDeclining software license and support revenues owing to a shift to the cloud remain concerns. In the third quarter, software licenses and support revenues totaled €3.08 billion, which decreased 4% (down 3% at cc) year over year. Software license revenues of €0.28 billion declined 15% (down 14% at cc).Macro Environment & Rising Costs Additional Concerns for SAPA volatile macroeconomic backdrop, along with increasing costs and stiff competition in the cloud space, is an additional headwind.SAP’s Estimate Revision ActivityIn the past 60 days, earnings estimates for SAP for the current and the next quarter have been decreased by 4.8% and 6.3%, respectively. The same for the current and the next quarter is revised upward by 1% and 0.3%, respectively.Image Source: Zacks Investment ResearchSAP’s Expensive ValuationSAP stock is trading at a premium with a forward 12-month Price/earnings ratio of 39.59X compared with the industry’s 33.79X.Image Source: Zacks Investment ResearchHow to Play the SAP Stock?SAP carries a Zacks Rank #3 (Hold) at present.A cautious approach is needed while dealing with SAP. The stock has a solid growth opportunity driven by demand for its solutions in the cloud space. Generative AI is emerging as another revenue driver.However, expensive valuation and mixed estimates revision activity along with external risks warrant caution. It might not be a judicious investment decision to bet on the stock at the moment but long-term investors already owning the stock can stay put.Stocks to ConsiderSome better-ranked stocks from the broader technology space are Plexus Corp., Inc. PLXS, InterDigital, Inc. IDCC and Workday Inc. WDAY. PLXS & IDCC presently sport a Zacks Rank #1 (Strong Buy) each, whereas WDAY carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.The Zacks Consensus Estimate for PLXS’ fiscal 2025 EPS is pegged at $6.79, unchanged in the past seven days. PLXS’ earnings beat the Zacks Consensus Estimate in three of the trailing four quarters, while missing once, with the average surprise being 10.3%. Its shares have increased 52.7% in the past year.The Zacks Consensus Estimate for IDCC’s 2024 earnings is pegged at $15.22, up 12.5% in the past 30 days. IDCC’s earnings beat the Zacks Consensus Estimate in each of the trailing four quarters, with the average surprise being 163.7%. Its shares have surged 77.8% in the past year.The Zacks Consensus Estimate for WDAY’s fiscal 2025 EPS is pegged at $7.11, up 2% in the past 30 days. WDAY’s earnings beat the Zacks Consensus Estimate in each of the trailing four quarters, with the average surprise being 9.3%.7 Best Stocks for the Next 30 DaysJust released: Experts distill 7 elite stocks from the current list of 220 Zacks Rank #1 Strong Buys. They deem these tickers "Most Likely for Early Price Pops."Since 1988, the full list has beaten the market more than 2X over with an average gain of +24.1% per year. So be sure to give these hand picked 7 your immediate attention. See them now >>Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report Plexus Corp. (PLXS): Free Stock Analysis Report SAP SE (SAP): Free Stock Analysis Report InterDigital, Inc. (IDCC): Free Stock Analysis Report Workday, Inc. 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