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SAP Bullish on IoT & Cloud Prospects, Macro Woes Remain

Zacks Equity Research

We issued an updated research report on German software giant–SAP SE SAP on Dec 6, 2016. Headquartered in Walldorf, Germany, SAP is one of the largest independent software vendors in the world and the leading provider of enterprise resource planning (“ERP”) software.

Year to date, SAP’s shares have recorded an average return of 4.9%, outperforming the Zacks categorized Computer Software-Services industry average return of 2.3%. However, the company has a dismal track record, having missed estimates thrice in the trailing four quarters, with an average negative surprise of 1.8%.

Moreover, the company has been faring poorly on the estimate revision front as well, with analysts becoming increasingly bearish on the stock over the past couple of months. With two downward revisions as against no upward revision in the past two months, the Zacks Consensus Estimate for fiscal 2016 earnings has declined from $3.35 to $3.12 per share. Dull prospects of the global IT industry, as well as flat customer spending projections, are largely attributable for this negative broker sentiment.

SAP’s earnings have been suffering from intensifying competition in the IT services industry, sluggish global economy and currency fluctuations, which are weighing on its profits. Prolonged softness in certain countries and inherent seasonality in technology spending of clients also exposes the company’s sales to risks of quarterly fluctuations. Moreover, the Brexit referendum may impact business confidence adversely and remains a risk.

On the positive side, SAP remains bullish about the prospects of its cloud business, and believes that the worldwide market for connected sensors and smart devices will be worth about €250 billion, by the end of this decade. It has undertaken investments worth $2.2 billion to enhance its budding IoT space, which is likely to emerge as the fundamental catalyst.

SAP AG ADR Price and Consensus

SAP AG ADR Price and Consensus | SAP AG ADR Quote

SAP is also acquiring Italian IoT firm – Plat.One – as part of its IoT initiative. This acquisition will enable SAP to integrate essential IoT capabilities into the SAP HANA Cloud Platform. Further, the company has earmarked a budget for further bolt-on acquisitions to fortify the IoT portfolio, going forward. Moreover, the company has revealed plans to launch a new product line — SAP IoT — which will integrate huge amounts of data from things connected to the Internet, with machine learning and SAP's real-time database S/4 HANA. The IoT market is anticipated to grow to almost $11 trillion by the year 2025 and we believe that these investments will offer a major boost into the budding IoT space.

This apart, exceptional traction of SAP S/4 HANA – the company’s proprietary offering – is propelling growth. We believe that steady market traction of these new products will significantly boost the company’s top-line performance, going forward. Moreover, robust traction of human capital management, customer engagement and commerce solutions are adding to the sales momentum.

However, SAP is still struggling with weakness in some key end markets such as Latin American countries and China, which may constrain revenue growth. Further, some reports suggest that the global IT industry is expected to remain sluggish in the near term. The cloud space has also become intensely competitive.

Despite such headwinds, we believe this Zacks Rank #3 (Hold) company has several growth drivers in place.

Stocks to Consider

Some better-ranked stocks in the broader computer & technology sector include Cirrus Logic Inc. CRUS, Aspen Technology, Inc. AZPN and Guidance Software, Inc. GUID. While Cirrus Logic sports a Zacks Rank #1 (Strong Buy), Aspen Technology and Guidance Software carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Cirrus Logic is a premier supplier of high performance analog circuits and advanced mixed-signal chip solutions. The company beat earnings estimates thrice in the trailing four quarters, with an average beat of 53.7%.

Aspen Technology deals in process optimization software and services. It boasts a remarkable average surprise of 23.6% for the trailing four quarters, having surpassed estimates strongly in each of them.

Guidance Software, an industry leader in digital investigative solutions, also has an impressive earnings history. The company has beaten estimates in all four trailing quarters, with an average surprise of 18.6%.

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