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Poor SAP – when a transition takes much longer than expected

SAP saw its valuation fall by 29.48 billion euros (nearly $35 billion) on Monday as shares cratered. The share collapse came after the company posted disappointing third-quarter results. JPMorgan cut its price target for SAP to 120 from 160 euros and downgraded the stock to neutral from overweight.

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Declines in operating profit and revenue for the third quarter

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The company posted declines in operating profit and revenue for the third quarter, cut its full-year outlook on earnings and revenue, and replaced its 2023 ambition with 2025 targets as the coronavirus pandemic continues to bite.

Reporting on a non-IFRS basis, the Walldorf, Germany-based company said operating profit for the quarter fell to 2.07 billion euros ($2.46 billion) from EUR2.09 billion in the third quarter of 2019, with an operating margin of 31.7% compared with 30.6%. Net profit for the period rose to EUR2.00 billion compared with EUR1.55 billion.

Total revenue slipped to EUR6.54 billion from EUR6.81 billion, with cloud revenue rising to EUR1.98 billion from EUR1.81 billion but software-licenses revenue fell to EUR714 million from EUR932 million. Services revenue dropped to EUR992 million from EUR1.16 billion.

Image Source: Imago Images

SAP was already dealing with some clouds

Europe’s biggest tech company by sales rose to prominence in the ’70s and ’80s selling enterprise resource planning software (which organizes business processes like HR, customer relationship management, and accounting into a shared database).

In the last decade, SAP has moved to join its legacy tech peers IBM and Microsoft aboard the cloud computing bandwagon. Back in the old days when you looked up your crush’s number in the white pages, companies stored their data on computer servers in the office basement. With the rise of cloud computing, they can now buy that software over the internet and outsource the hardware to cloud infrastructure providers like Amazon, Google, and Microsoft.

The cloud is cannibalizing the software licensing model SAP used to make its big bucks from. So SAP is pushing customers to cloud-based software subscriptions, which bring in less money upfront but offer a more predictable, recurring revenue stream.

That transition takes time, even without a pandemic. It took time with competitors such as Oracle and while Covid-19 has accelerated cloud adoption, it’s also created more uncertainty for businesses—forcing some to hit pause on big IT investments. The latest wave of Covid infections means SAP is expecting to feel those impacts through the first half of 2021.

So what? Tech stocks have buoyed the market recovery, but SAP’s plunge could undermine investor confidence in other software vendors facing similar headwinds.

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