A mixture of sunshine and clouds
A cloudy outlook at SAP is not the same as gloomy prospects. On the contrary, the IT Cloud is the key growth driver for the Walldorf-based company. And even four years after the start of its own business transformation, from the sale of software licences to the cloud-based subscription model, there is little reason to doubt the momentum. This is because the software giant can build on a large and loyal customer base, due to the penetration of SAP products. Less than half of these customers have even begun their journey to the cloud. A slightly slower pace in the cloud order backlog, which SAP has announced for the current year, should therefore cause investors little headache, also in view of the current record-high order backlog of 18 billion euros.
Long-term contracts
In addition, the subscription-based software model, achieved through a significant financial investment, is generally associated with long-term contracts that are less affected by economic downturns. Especially as SAP is participating in a growing dynamic trend outside of Germany and Europe, namely in the USA.
However, it's not all sunshine. Investment in Germany and Europe in particular, where the company benefits from a home advantage versus the competition, runs the risk that potential returns will not stand up to international comparison. The Executive Board has openly acknowledged these concerns. Beyond the brake on the stock price because of the Dax index weighting cap (which has even led to market concerns that the company might delist in Germany), other factors could hit the group even harder.
The progress and growth of a data economy in the cloud, which is being driven more than ever by the ongoing AI revolution, requires a minimum level of scaling. Fragmentation therefore slows down growth. Europe must face up to this realisation and draw the correct conclusions. Otherwise, the digital economy as a whole will be at a disadvantage compared to other regions. As a result, tech heavyweights in particular are questioning the location. Ericsson has done so publicly. SAP could be next.
