SAP SE SAP stock has proven resilient in the past six months with a gain of 32%, outperforming Computer-Software industry, Zacks Computer and Technology sector and the S&P 500 composite’s growth of 1.4%, 8.4% and 8.6%, respectively. Pivot to the cloud has been the driving force behind the SAP stock’s good run.

Price Performance

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Cloud Remains SAP’s Major Growth Driver

Continued momentum in the cloud business is driving SAP's top line growth. SAP outpaced its cloud revenue goals, with total cloud backlog, a key indicator of go-to-market success in cloud business, soaring 43% year over year to €63.3 billion at the end of 2024. Cloud revenues surged 25% to €17.1 billion in 2024.

The key growth driver was the Cloud ERP Suite, which contributed significantly to the overall cloud revenue growth. The 33% rise in Cloud ERP Suite revenues for 2024 was a result of SAP’s focus on providing advanced, scalable solutions for enterprise resource planning in the cloud. 

The continued strength in Rise with SAP and Grow with SAP solutions is also noteworthy. SAP's cloud-focused strategy delivered strong results, with half of fourth-quarter cloud order entries incorporating AI-use cases. This highlights SAP's growing focus on data and Business AI, which is poised to play a pivotal role in driving revenue growth through 2027. 

The company will offer flexible licensing options that let customers seamlessly upgrade and transition to its latest cloud solutions across the entire SAP business suite, eliminating the burden of extra negotiations. Going forward, it plans to expand Wise with SAP, including the full business transformation toolkits like Linac, Signavio and Walkman. 

The introduction of the SAP Green Ledger solution in the fourth quarter further indicates SAP's commitment to innovation and sustainability. Combined with sustainability tools for data tracking and audits, the SAP Green Ledger links emissions data with financials. This empowers businesses to make smart, eco-friendly decisions and meet regulations.

Increasing AI Investments Bode Well for SAP

SAP remains optimistic about the generative-AI trend and expects it to positively impact revenues going forward. Management highlighted that it has incorporated more than 1,300 skills into AI co-pilot which can now automate 80% of the most used activities by users. In go-to-market, AI-assisted contract validation has cut SAP's average contract booking time by 75%. In corporate functions, AI-powered quote-to-cash automation has boosted productivity tenfold.

In 2025, SAP is strengthening its commitment to AI by heavy investments. More than 30,000 developers will focus on improving SAP’s AI foundation and building new use cases. Management expects its current AI implementations to generate around €300 million in efficiency gains in 2025 and aims to surpass €0.5 billion in the near term.

SAP’s Robust Outlook

SAP’s outlook for 2025 has been updated and its previous Ambition 2025 plan has been replaced. For 2025, management now anticipates cloud revenues in the range of €21.6-€21.9 billion, indicating an increase of 26-28% at cc on a year-over-year basis.

Cloud and software revenues are now expected in the range of €33.1-€33.6 billion, with an increase of 11-13% at cc on a year-over-year basis. It now estimates 2025 non-IFRS operating profit in the range of €10.3-€10.6 billion, indicating a rise of 26-30% at cc on a year-over-year basis. Free cash flow is now estimated to be around €8 billion at actual currencies.

SAP Faces Multiple Headwinds

Declining software license and support revenues owing to a shift to the cloud remains a concern. In the fourth quarter, software licenses and support revenues totaled €3.56 billion, which decreased 3% (down 4% at cc) year over year. Software license revenues of €0.68 billion declined 18% (down 19% at cc) year over year.

A volatile macroeconomic backdrop, along with increasing costs and stiff competition in the cloud space, is an additional headwind.

How to Strategize Investment in SAP

SAP has a solid growth opportunity driven by demand for its solutions in the cloud space. Generative AI is emerging as another revenue driver. 

In the past 60 days, analysts have increased their earnings estimates for the current and the next quarter by 4.4% and 5.2%, respectively. The same for the current and the next year is revised upward by 1.7% and 2.5%, respectively.

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However, a volatile macroeconomic backdrop, along with increasing costs, stiff competition and expensive valuation warrants caution. SAP is trading at a premium with a forward 12-month Price/earnings ratio of 41.48X compared with the industry’s 28.99X.

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At present, SAP carries a Zacks Rank #3 (Hold). Consequently, it might not be a judicious investment decision to bet on the stock at the moment, but long-term investors already owning it can stay put.

Stocks to Consider

Some better-ranked stocks from the broader technology space are Verint Systems Inc. VRNT, Intuit Inc. INTU and Open Text Corporation OTEX. VRNT sports a Zacks Rank #1 (Strong Buy), whereas INTU and OTEX carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

The Zacks Consensus Estimate for VRNT’s fiscal 2026 EPS is pegged at $3.13, unchanged in the past seven days. VRNT’s earnings beat the Zacks Consensus Estimate in three of the trailing four quarters, while missing once, with the average surprise being 8.8%. The stock has declined 26.6% in the past year.

The Zacks Consensus Estimate for INTU’s fiscal 2025 earnings is pegged at $19.33, up 0.3% in the past 30 days. INTU’s earnings beat the Zacks Consensus Estimate in each of the trailing four quarters, with the average surprise being 11.85%. Its shares have plunged 6% in the past year.

The Zacks Consensus Estimate for OTEX’s fiscal 2025 EPS is pegged at $3.80, unchanged in the past seven days. OTEX’s earnings beat the Zacks Consensus Estimate in two of the trailing four quarters, while missing in one quarter. It matched in the remaining quarter with the average surprise being 7.2%. The stock has declined 32.8% in the past year.

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