We came across a bullish thesis on SAP SE (SAP) on Substack by Northwest Frontier Capital. In this article, we will summarize the bulls’ thesis on SAP. SAP SE (SAP)’s share was trading at $288.87 as of Feb 11th. SAP’s trailing and forward P/E were 105.82 and 44.25 respectively according to Yahoo Finance.
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SAP’s recent results may have prompted muted reactions due to concerns over a slight deceleration in cloud backlog growth for 2025, but this narrow perspective misses the bigger picture. SAP is executing at an exceptional level, positioning itself for sustained revenue acceleration, margin expansion, and a significant AI-driven opportunity. The company has now delivered 11 consecutive quarters of stable or accelerating cloud backlog growth, expanding from €8 billion to €18 billion, defying early skepticism about its ability to transition customers to the cloud. This success stems from SAP’s commitment to transforming its core ERP product into a cloud-native solution through S/4 and guiding customers through complex cloud migrations with its RISE program. The result has been a formula that continues to drive growth and enhance customer retention, a trend SAP’s leadership expects to strengthen further.
CEO Christian Klein underscored this momentum by highlighting that retention rates are improving, cloud revenue growth remains strong, and adoption rates continue to rise. While some peers, such as Microsoft and ServiceNow, have faced challenges selling AI-driven products to enterprises, SAP benefits from its ability to sell full-scale cloud transformation, a trend reinforced by recent strong results from Atlassian. This confidence is also reflected in SAP’s long-term revenue opportunity. The company estimates a 3x cloud conversion multiple, meaning that converting the remaining €11 billion in maintenance revenue could yield an additional €33 billion in cloud revenue over time. This presents a substantial growth runway, with SAP well-positioned to capitalize on it.
Beyond revenue expansion, SAP’s margin story is an equally compelling yet underappreciated aspect of its transformation. The company’s cloud gross margin rose 1.4 percentage points to 73.3% in 2024, driven by infrastructure optimization, scale benefits from its centralized HANA database, and increased adoption of multi-tenant architectures. As a result, operating profit surged 25% to €8.15 billion, underscoring the efficiency gains from SAP’s transition. These trends align with past cloud transformation success stories. When comparing SAP’s operating margin trajectory to those of Microsoft, Adobe, and Autodesk—companies that underwent similar transitions—SAP’s current margin expansion of four percentage points is still in its early stages. Historically, cloud transitions have led to margin expansions of around 15 percentage points over time. Given SAP’s execution and ongoing cost efficiencies, margins have significant room for further growth, a factor not yet fully reflected in investor sentiment.
SAP’s AI strategy has been a weaker point in its transformation narrative, with previous efforts, such as the AI agent Joule, appearing more as checkbox solutions for investors rather than a meaningful strategic shift. However, Christian Klein’s latest statements suggest that SAP is pivoting toward a more substantive AI approach. He highlighted that companies spend nearly half of their IT budgets on data and analytics, yet enterprise data remains fragmented across various silos. This fragmentation limits the effectiveness of AI, as disconnected data prevents AI agents from developing a holistic view of business operations. SAP aims to address this challenge by harmonizing structured and unstructured data across SAP and non-SAP systems, creating a unified data framework that enhances AI-driven decision-making.
This strategy could be a game-changer. Enterprise data fragmentation has long been a fundamental challenge, with different departments operating in isolated data environments. SAP’s ability to unify these disparate datasets and inject business context into AI-driven workflows could create a unique competitive advantage. Unlike standalone AI tools that struggle with incomplete data, SAP is in a prime position to deliver integrated AI solutions that provide actionable insights across an entire enterprise. If executed successfully, this AI-driven transformation could mark a pivotal shift in SAP’s value proposition, solidifying its leadership in enterprise software.
Investors have yet to fully appreciate SAP’s dual growth engine—cloud transformation and AI-driven operational intelligence. The company’s cloud momentum remains strong, with a substantial conversion opportunity ahead, while margin expansion and AI innovation offer additional upside. With all the building blocks in place, SAP’s transformation story is far from over, and the market may still be underestimating its long-term potential.
SAP SE (SAP) is not on our list of the 30 Most Popular Stocks Among Hedge Funds. As per our database, 36 hedge fund portfolios held SAP at the end of the third quarter which was 31 in the previous quarter. While we acknowledge the risk and potential of SAP as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than SAP but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article was originally published at Insider Monkey.