Strong cloud momentum: Stifel raises SAP price target

Investing.com - The investment firm Stifel has raised the price target for the European software giant SAP SE (ETR:SAPG) from €195 to €210 and maintained its rating at "Buy". The price target increase comes ahead of the highly anticipated release of SAP's Q2 results in mid-July. Stifel particularly highlights the strong performance in the cloud business and robust operating margins.

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In a report available on Monday, Stifel expects SAP to deliver strong results for the second quarter of 2024. Experts see enormous growth potential, especially in the cloud segment. Cloud revenues are expected to reach €4.16 billion, an increase of 25% year-on-year at constant exchange rates.

Another highlight of the Stifel analysis is the improvement in gross margins in the cloud sector. Experts expect the gross margin to rise to 72.9% in the second quarter due to the successful integration of the Converged Cloud, an increase of 40 basis points sequentially and 180 basis points year-over-year.

“The gross margins in the cloud sector should continue to rise in the rest of fiscal year 2024, thanks to strong revenue growth and the scale effects of the Converged Cloud,” the analysts emphasize in their note.

While cloud revenues are rising sharply, analysts forecast a decline in license revenues by 24% to €239 million. This decline is seen as part of SAP’s long-term strategy to increasingly focus on recurring revenues from cloud services.

Specifically, Stifel forecasts an operating profit of €1.76 billion for the second quarter, corresponding to an operating margin of 21.4% - an improvement of 210 basis points year-on-year. SAP is expected to maintain its forecast for the entire fiscal year. Expectations here are for cloud revenues of €17.0 to 17.3 billion, cloud and software revenue growth of 8 to 10%, operating profit between €7.6 and 7.9 billion, and free cash flow of about €3.5 billion.

Stifel values SAP’s recurring business at €210 per share, with the maintenance sector contributing €45 and the cloud business €165 per share. This valuation is based on a discounted cash flow model as well as peer-group EV/revenue multiples.

SAP will release its Q2 figures on July 22 after the US market closes.

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