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International Stock Focus - SAP

International Stock Focus - SAP

Last Price: $94.13 USD
Sector: Technology
Market Cap: $122.35Bn USD
Fair Value: $132.01 USD

 

Systems Applications and Products in Data Processing, as the name translates into English, or, better still, SAP, based in Walldorf near Frankfurt is one of the world’s leading providers of software for businesses. The company’s ‘enterprise resource planning’ software forms the nerve centres of businesses because it runs core ‘back office’ processes. SAP software manages analytics, customers, financials, human resources, payrolls and supply chains and brings in more than 80% of revenue. A recent focus of SAP’s has been to steer clients to cloud-based software. So successful is SAP, the company’s software is used by more than 425,000 customers in more than 25 industries and over 180 countries.

Nearly 50 years after its founding, SAP is well positioned for the future for five reasons. The first is that the company enjoys entrenched market positions in core enterprise applications and business intelligence software, especially among large companies in developed countries. These companies are likely to stay with SAP – the company enjoys low annual customer attrition rates – because switching costs are high. Businesses can’t easily change software providers because it is tightly coupled with their business processes, often through customisation, and switching to a different software provider is risky and costly.

A second advantage is that SAP software products are world-beaters. They have been honed over time so they can work across departments within a company, throughout industries and in any location. A third advantage is that SAP has built a global sales and support network that few can match. Another plus is that the company enjoys economies of scale in research and development.
Lastly, SAP is well positioned to benefit from the accelerating uptake in cloud computing. These reasons help SAP generate significant excess returns and regular dividends for shareholders.

Challenges remain, of course. SAP faces strong competitors such as Oracle, Workday and Salesforce.com. The company has expanded its cloud portfolio largely through acquisition rather than organically. Executive turnover has been high recently. This was highlighted when CEO Bill McDermott resigned unexpectedly in October after 10 years in the role during which time he effected the drive into cloud computing. (McDermott was replaced by two co-CEOs, which is not an uncommon practice at SAP.)
But SAP didn’t become Europe’s most valuable tech company by market value without reason. The company has sustainable competitive advantages in growing IT segments that position it well to deliver for investors in coming years.

SAP enters 2020 with myriad goals. The company wants to push its users onto its next-generation enterprise-resources planning software (called S/4HANA), expand the adoption of its broader software suite, triple its cloud business by 2023 and expand margins. To jumpstart the formation of a formidable cloud business, SAP has spent more than US$25 billion buying cloud-related companies since 2011. While SAP faces a challenge in integrating these assets, SAP’s cloud computing business is thriving judged on sales numbers – revenue rose 38% (before currency impact) last year to five billion euros.


An added impetus for future sales is that in October SAP announced a new three-year partnership with Microsoft. In this arrangement, the company becomes a SAP preferred hyperscale partner and will resell SAP Cloud Platform alongside its Azure portfolio.
The tie-up is appropriate in the sense that it links two computing pioneers founded in the 1970s that are still giants of the IT world today.
Sources include company filings and website, Bloomberg and Hoover’s, a Dun & Bradstreet Company.

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