1. SAP SE (NYSE:SAP)
Market Cap as of August 9: $109.6B
SAP SE (NYSE:SAP) is a German multinational software company based in Walldorf, Baden-Württemberg. It specializes in the development of enterprise software to manage business operations and customer relations. It also sells database software and technology, cloud engineered systems, and other ERP software products. SAP (NYSE:SAP) is the leading ERP software vendor in the world and largest non-American SaaS company by revenue, the world’s third-largest publicly-traded software company by revenue and the second-largest German company by overall market capitalization. In the fiscal year of 2021, the company posted a total revenue of $28.5 billion, and with over 107,415 employees serving more than 425,000 customers in over 180 countries globally, SAP (NYSE:SAP) is the biggest SaaS company in Europe by market capitalization.
In order to pose a greater challenge to competitor Oracle Corp. (NYSE:ORCL), SAP (NYSE:SAP) has started to acquire several companies which sell cloud-based SaaS products since early 2012. As of 2022, SAP (NYSE:SAP) offers a very large array of user-friendly SaaS subscription-based models for its customers including SAP Ariba, SAP Business by Design, and SAP S/4 HANA Cloud, all designed to save cost and time. However, SAP’s (NYSE:SAP) most notable SaaS solution has to be SAP Concur, a provider of cloud-based travel and expense management software, which was acquired by SAP (NYSE:SAP) in 2016 through an aggressive purchase of $8.3 billion, a move which rendered many analysts thoroughly confused. It is SAP’s (NYSE:SAP) most expensive purchase to date. According to reports, SAP (NYSE:SAP) exceeded its revenue projections due to expansion in its SaaS portfolio and the success of SAP HANA. In 2019, SAP (NYSE:SAP) announced plans to terminate the employment of over 4000 employees over plans to shift to more modern cloud-based technologies such as blockchain, IoT, and artificial intelligence.
In their Q1 2022 investor letter, Polen Capital, an investment management firm, alluded to SAP’s (NYSE:SAP) transition into cloud. This is what they said:
“In our opinion, SAP(NYSE:SAP) is demonstrating that their cloud transition and RISE with SAP (NYSE:SAP) strategy are working. We added to our position upon evidence that CEO Christian Klein’s strategy is bearing fruit, and the stock trading down to an attractive valuation during the quarter. The strategy and sell-off are connected, and we believe it provided an opportunity for long- term shareholders. The company recently reported weak 2022 margin and FCF guidance. This was expected if cloud growth accelerated – which it has. Current cloud backlog has accelerated to a mid-20% growth rate, and the S/4 HANA Cloud Backlog and Cloud Sales have accelerated as well. Cloud, which tends to be a very sticky business with high recurring revenue, is now a >$10bn business and represents roughly 40% of sales.
Our research shows this should only increase over the next five years. If management continues to successfully execute its strategy, the transition should create a mechanical lift to margins and greater levels of FCF. We believe SAP (NYSE:SAP) is a durable business led by capable management that is poised to deliver high-quality mid-teens earnings growth over the next five years.”
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