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SAP - SAP AG


valueinvestor
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Hmm... thought this would be the most talked about post today. SAP down 20% - have been eyeing this beast ever since 2015. Even with the discount, I don't think it's outrageously cheap, but it is more a fair value for a wonderful business.

 

Unless my information is outdated (wouldn't be surprised - stopped looking at it in 2015), but stickiness is SAP's game. I've know companies that could not change SAP ERP for years. Apparently the best place to work with for years, but why now take a look now?

 

Coronavirus hasn't killed the business - far from it. They will grow and the cloud business has been growing quite rapidly.

 

I really wish I can go in deeper, but time is quite restricted now that I'm a Chief Babysitter in my self-employed life. I had a file on this company, and if I find it, I will post it up.

 

However, simply if you figure out that this will grow at a healthy clip, and it won't go the way of IBM but rather Microsoft, then you can expect a multiple expansion too. It's traded historically at a high premium to the markets for a long time.

 

I liken this to Walmart in 2015 near single digits PE, or Microsoft.

 

Also helps that we have a new CEO that was hired 2019, but really I think was hired 2020, as 2019 he was a co-CEO.

 

I haven’t made a position, as I'm unwilling to sell other positions to make room, but may make a tracker to follow the progress.

 

Only wish I could find a company that is of smaller size with larger runway and same kind of setup here. 

 

 

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It's a race between cloud and on-prem and if customers were double dipping "just to be safe" SAP and other legacy ERP companies could see their on-prem revenues collapse without corresponding cloud revenues.

 

I don’t  think customer are double dipping, but they may decide to move some modules from ERP to other cloud vendors when they move. It is hard to rip out the entire ERP system, but it is possible to replace modules like HR or travel (Concur) to Alternative vendors that then integrate their module(s) into the customers SAP system.

 

SAP has seen some slowdown in their cloud offering as well, not just on-premise. This could mean that SAP cloud offerings have trouble competing or that cloud vendors might see lingering effects from COVID-19 as well

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I've tried taking look at the product level, but it seems there no real groundbreaking difference between SAP and other cloud offerings.

 

I'm not really looking at on-prem as that's not the future, unless they need something secured (but that's even a faulty argument).

 

It just seems that SAP is just late on the ball, and trying to catch up.

 

Not sure what their competitive advantage will be ten years from now, but they are pulling the right steps of not optimizing margins and reinvesting into the long-term potential of business IMO.

 

With that being said, if valuation goes to <10x mean earnings, I will take a bite, especially if the sentiment is that the business is going away. I really think it's a low probability that SAP will have on-prem and cloud disappear. The market for cloud offerings is still not mature yet.

 

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Business model is fantastic. I worked for a huge corp that used SAP. SAP is the mother of switching costs. But SAP management is terrible, their financials are impossible to understand and Gemany is a terribly shareholder unfriendly country. Just try to understand their finanacials. I dare you. I double dare you mf*er.

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It's no question that SAP has huge switching costs. But that's true pretty much for all enterprise software. There problem I've always had with SAP is that they don't seem to have much growth going on. I mean the top line is growing nicely but their earnings and operating cash flow not so much. This is double weird for a company like SAP because software companies have soooo much operational leverage.

 

Even after the recent drop the p/e is 23. At 23 you should have some decent growth going on not just switching costs. SAP doesn't seem to have it. At 16 this would be interesting. But there's a long way from 23 to 16.

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Business model is fantastic. I worked for a huge corp that used SAP. SAP is the mother of switching costs. But SAP management is terrible, their financials are impossible to understand and Gemany is a terribly shareholder unfriendly country. Just try to understand their finanacials. I dare you. I double dare you mf*er.

 

It’s hard to rip out the core SAP (which does all the financial transactions) but you can rip out non- critical modules like their HR module or travel (Concur). The company I work for has replaced their HR module with Workday and while there were some delays, the transition worked fine and Workday is a huge improvement over heat we had before.

 

This things go straight against SAP’s strategy to add modules to their existing core system and expand that way. SAP is better than Oracle (which seems very rigid and non-intuitive to use) but it isn’t really close to as good as best in class software that one can attach to the core SAP system.

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