SAP helps sink NASDAQ, but the software maker may be a poor indicator
That's why SAP's (SAP) announcement on Wednesday morning that it now expects lower revenue for the full year than it previously forecast because of weakness in emerging markets and Japan understandably rattled investors. Shared of the Walldorf, Germany-based company tumbled nearly 10 percent to $46 on the day. That beating contributed mightily to the tech-heavy Nasdaq turning in the worst performance among the major indexes, dropping 2.66 percent, or 56 points, to 2,059.
SAP's outlook seems to pour cold water on the building optimism in the tech sector in the wake strong results from giants like Microsoft (MSFT), Intel (INTC), and Apple (AAPL). Indeed, chip giant Texas Instruments (TXN) cited growth in Asia and Japan as causes for optimism in its upbeat third-quarter results.
SAP's results aren't too comforting. With 82,000 customers in 120 countries at the end of last year, the $56 billion behemoth is often seen as a bellwether for global tech spending. Some analysts already predict that SAPs outlook will serve as a drag on the broader software sector.
But investors should take SAP's announcement with a grain of salt. In this case, its outlook may be more reflective of SAP's own position in the industry rather than as a barometer of the broader market.
SAP sells big, expensive packages of enterprise-resource software and customer-relationship-management software that helps companies keep a better tab on their business. Its traditional enterprise-software business model is increasingly under pressure from nimbler rivals like Salesforce.com (CRM) and SugarCRM, which use new technology like software-as-a-service and open-source code to make their products much cheaper.
SAP's lengthy sales process makes it difficult for rivals to uproot. Being deeply intertwined in a customer's business process gives it the chance to up-sell and receive lucrative service contracts. But at time when customers remain skittish, SAP's bent toward big-ticket sales may not be as appealing as the cheaper approaches favored by its competitors.
"Management noted that the deal pipeline continues to improve though the sales cycle has lengthened and customers are opting for smaller deals," Argus Research analyst Joseph Bonner wrote on Wednesday.
Parsing through SAP's commentary about overseas markets also reveals that the malaise may not be that widespread. The company was particularly hard hit by a slowdown in Japan, where revenue declined 25% compared to a year ago, SAP president of global field operations Bill McDermott said on a conference call with investors.
But McDermott explained away business conditions in Japan as "the perfect storm." A change in government due to the recent Japanese election has led to a broad investment policy reviews. That has put many purchases in limbo until the reviews conclude, McDermott said.
Considering the pummeling that tech stocks suffered today, investors should take at least some solace in the underlying reasons for SAP's poor showing.