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Why SAP Belongs in Your Portfolio Enterprise software provider SAP SE (SAP) continues to witness strong sales momentum as its 'RISE with SAP' offering gains increasing market traction....

By Imon Ghosh

This story originally appeared on StockNews - StockNews

Enterprise software provider SAP SE (SAP) continues to witness strong sales momentum as its 'RISE with SAP' offering gains increasing market traction. Consequently, the company has raised its 2021 outlook. With more organizations adopting SAP's cloud solutions, we believe the stock has plenty more upside to deliver. Let's discuss.

Based in Walldorf, Germany, SAP SE (SAP) is an enterprise application software company known for its ERP software. With more companies adopting SAP's cloud portfolio to transform their business processes, its cloud revenue growth has accelerated significantly. The stock has gained 10.7% year-to-date and 14.4% over the past six months.

Expanded strategic collaboration with Google Cloud and significant sales growth stemming from its Qualtrics business segment in the second quarter of 2021 should be a boon for SAP. Its S/4HANA enterprise resource planning suite attracted more than 600 new customers, taking its total adoption to more than 17,000 customers in its last reported quarter.

Furthermore, a substantial contribution from its Sapphire Ventures and growing adoption of its 'RISE with SAP' business offering should position SAP to maintain its momentum and deliver solid returns in the near term.

Click here to check out our Cloud Computing Industry Report for 2021

Here is what we think could shape SAP's performance in the coming months:

Strategic Partnerships Bode Well

On July 28, SAP and International Business Machines Corporation (IBM) announced that SAP plans to introduce its finance and data management solutions to IBM Cloud to help financial institutions accelerate their cloud adoption. The partnership is designed to help banks and insurers meet the industry's strict security and compliance requirements and speed their business transformation.

Also this month, Google Cloud and SAP forged a strategic collaboration to allow customers to accelerate their cloud migration and execute business transformations. Under this agreement, Google Cloud will be a strategic cloud partner for SAP's 'RISE with SAP' program. The partnership should enable SAP to serve customers with its 'RISE with SAP's offering and expand its cloud business.

Impressive Management Guidance

As a result of its strong business performance in the second quarter of 2021, SAP has lifted its full-year 2021 outlook. Management expects cloud revenue to range between €9.3 – 9.5 billion ($11.07-$11.31 billion), up 15% to 18%. Its cloud and software revenue is expected to fall between €23.6 – 24.0 billion ($28.09-28.57 billion), up 2% to 3%. Furthermore, SAP expects more than €4.5 billion ($5.36 billion) in free cash flow and operating cash flow of roughly €6 billion ($7.14 billion).

Favorable Analyst Estimates

The $1.45 consensus EPS estimate for the current quarter, ended June 2021 indicates a 5.8% improvement year-over-year. Its EPS is expected to increase at the rate of 8.1% per annum over the next five years. SAP has an impressive earnings surprise history too; it beat the consensus EPS estimates in each of the trailing four quarters.

Analysts expect SAP's revenues to rise 2.2% year-over-year to $7.97 million in the next quarter and 3.9% year-over-year to $33.78 billion in 2022.

Strong Financials

SAP's S/4HANA Cloud revenue increased 33% from the prior-year quarter to €257 million ($305.92 million) in the second quarter ended June 30, 2021. Its EPS came in at €1.75 ($2.08), representing a 50% increase year-over-year, driven primarily by a substantial contribution from Sapphire Ventures. Also, the company's share of more predictable revenue stood at 76% in the second quarter, compared to 73% in the prior-year period. SAP's Qualtrics segment revenue has grown 25% year-over-year to €211 million ($250.85 million), driven by strong renewal rates and expansions.

POWR Ratings Show Promise

SAP has an overall B rating, which translates to Buy in our POWR Ratings system. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.

Our proprietary rating system also evaluates each stock based on eight different categories. SAP has a B Quality Grade. This justifies the stock's 71.8% gross profit margin, which is 47.9% higher than the 48.5% industry average.

Also, in terms of Sentiment Grade, SAP has an A. Analysts' expectations regarding its earnings and revenue growth are consistent with this grade. Also, the company has a B Stability grade.

Click here to see the additional POWR Ratings for SAP (Value, Growth, and Momentum).

The stock is ranked #8 of 138 stocks in the Software – Applications industry.

If you're looking for other top-rated stocks in the same industry with an Overall POWR Rating of A or B, you can access them here.

Click here to check out our Software Industry Report for 2021

Bottom Line

SAP's expanding clientele as more customers adopt the 'RISE with SAP' subscription offering, and upbeat full-year guidance, have heightened investors' interest in the stock. Furthermore , with cloud migration gaining traction, the company is uniquely positioned to drive business growth in the long run. Therefore, we think it could be wise to bet on the stock now.

Click here to check out our Cloud Computing Industry Report for 2021

SAP shares fell $1.09 (-0.76%) in premarket trading Friday. Year-to-date, SAP has gained 11.14%, versus a 17.90% rise in the benchmark S&P 500 index during the same period.

About the Author: Imon Ghosh

Imon is an investment analyst and journalist with an enthusiasm for financial research and writing. She began her career at Kantar IMRB, a leading market research and consumer consulting organization.


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