We came across a bullish thesis on SAP SE (NYSE:SAP) on Substack by Northwest Frontier Capital. In this article, we will summarize the bulls’ thesis on SAP. SAP SE (NYSE:SAP)’s share was trading at $243.12 as of Jan 2nd. SAP’s trailing and forward P/E were 100.71 and 36.90 respectively according to Yahoo Finance.
A senior executive at a large desk reviewing the financial reports of the software and application company.
SAP’s Q3 2024 results underscore the company’s continued momentum, with total revenue reaching EUR 8.47 billion, marking a 10% year-over-year increase that aligns with market expectations. Cloud revenue, a key growth driver, surged 27% year-over-year to EUR 4.35 billion, reflecting sustained strength in SAP’s core Cloud ERP suite, which grew by 36%, despite a modest 5% growth in its Extension Suite. The overall cloud backlog grew 25% to EUR 15.37 billion, underscoring a robust pipeline. Cloud gross profit also saw a 27% year-over-year increase to EUR 3.2 billion, with margins improving by 81 basis points to 73.7%. Operating profit rose 22% to EUR 2.24 billion, beating consensus expectations by 10%, while earnings per share (EPS) increased by 6%, reflecting both top-line growth and margin improvement. Free cash flow (FCF) saw an impressive 44% year-over-year increase to EUR 1.25 billion, marking the third consecutive quarter of strong FCF performance despite cash restructuring costs.
SAP’s cloud business continues to demonstrate resilience, with cloud revenue growth accelerating from 24% in Q2 to 26% in Q3, a remarkable feat given the broader enterprise software backdrop. This growth is largely driven by SAP’s cloud ERP suite, which has become integral to customers’ digital transformation strategies, particularly in industries like chemicals and automotive. SAP’s ability to attract new customers while expanding existing relationships has been a key differentiator, with 60% of deals exceeding $5 million, driven largely by existing clients. CEO Christian Klein emphasized that customers view SAP’s cloud ERP suite as essential for restructuring their portfolios, making it a critical component of their transformation agendas.
The company has also undertaken significant strategic initiatives to fuel future growth. SAP announced a major reorganization of its go-to-market strategy, focusing on expanding its mid-market segment and leveraging its partner ecosystem to drive adoption. This shift aims to capitalize on SAP’s successes with smaller, previously underserved customers and unlock new growth potential. SAP’s move to enhance cloud gross margins—now tracking towards 75% in 2025—through improved infrastructure centralization and multi-tenant architectures further strengthens its financial outlook.
Despite the stock’s impressive 60% year-to-date increase, driven by a re-rating from 20x P/E to around 30x, the investment case remains compelling. SAP’s accelerating revenue growth, combined with margin expansion from cloud services, positions the company for continued strong earnings growth. The increased focus on operational efficiency and cloud-driven profitability could support mid-teens earnings growth over the coming years, even if further valuation expansion is limited. Given the ongoing strategic initiatives and improved cash flow dynamics, SAP’s future growth trajectory looks robust, making it an attractive investment for those confident in the company’s ability to deliver on its growth strategy.
SAP SE (NYSE:SAP) is not on our list of the 30 Most Popular Stocks Among Hedge Funds. As per our database, 36 hedge fund portfolios held SAP at the end of the third quarter which was 31 in the previous quarter. While we acknowledge the risk and potential of SAP as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than SAP but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article was originally published at Insider Monkey.