One of Europe's most important tech stocks finally convinces US investors – BNN Bloomberg

(Bloomberg) — German technology conglomerate SAP SE has long been one of Europe's most important technology stocks, but now it's attracting interest from American investors — and breaking free from a long history of being undervalued by its competitors.

After rising 42% this year, SAP currently trades at 34 times forward earnings, putting the company's valuation above the MSCI index of U.S. software and IT services companies for the first time since 2018. SAP has also consolidated its valuation advantage over U.S. rivals such as Salesforce Inc. and Oracle Corp. Investors are impressed by SAP's success in migrating customers to more lucrative cloud-based products.

“SAP's results have been strong recently, especially against a backdrop of weaker reports from peers,” said Marcus Morris-Eyton, who holds the stock as the third-largest position in AllianceBernstein's European growth portfolio. SAP's latest quarterly results showed 25% growth in cloud revenue – setting the company apart from Salesforce and Workday Inc., which have raised investor concerns about their slowing growth.

Investors outside Europe are also taking note of the German company's rise. Around 38 percent of SAP shares are currently in the hands of US investors, according to data compiled by Bloomberg. That's almost the highest figure recorded in data tracking publicly reported shareholdings dating back to 2010.

“SAP has historically been unpopular with U.S. investors due to its lack of growth potential, but that is starting to change,” said Ben Barringer, global technology analyst at Quilter Cheviot.

The company is also making a big effort to expand its investor base. During the annual Sapphire conference in Orlando last year, CFO Dominik Asam promised to attract the attention of U.S. investors, saying, “This is where the battle will be decided.”

To that end, SAP delayed its earnings release in October until after the New York Stock Exchange closed, as most major U.S. technology companies do. The company generated about a third of its revenue in the U.S. last year.

There is still a long way to go to attract American investors, say analysts at Barclays. The company's investor base in the US is still small compared to other large European companies such as ASML Holding NV and Novo Nordisk A/S, but it can grow if SAP impresses investors with its results and committed US communications, they wrote in a research report last month.

SAP's recent success is no accident. The company was considered a latecomer to the cloud transition, but efforts to convert users from on-premise licenses to the more lucrative subscription model are now bearing fruit.

SAP has boosted its cloud business by bundling it with artificial intelligence tools, and its upgrade cycle likely has more room to run. About a third of the company's 35,000 customers have yet to move from legacy systems to the newer S/4 HANA program, according to a Bank of America estimate.

Still, the European software giant faces some of the same issues as its U.S. rivals. One uncertainty is how long the benefits of migrating to the cloud will last. Analysts on average expect revenue growth to rise from about 9% this year to 11% over the following two years before tapering off in 2027, the date the company has set for its customers to move to newer systems.

And there is also the question of how AI functions can be monetized. So far, SAP has mainly used AI tools to encourage customers to switch to cloud-based software rather than charging higher prices for its products, says Nicolas David, analyst at Oddo BHF.

Nevertheless, SAP's rising valuation shows that investors in Europe – and increasingly in the US – are willing to pay a higher price for SAP shares during this phase of high growth.

“The growing interest in SAP among U.S. investors is positive and shows that the stock is now attractive on a global level given the acceleration of revenue growth and margins,” said Morris-Eyton of AllianceBernstein.

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– With assistance from Subrat Patnaik and Amy Thomson.

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