Why SAP AG's Weak Performance This Year Is a Buy Opportunity
Enterprise application software vendor SAP is making strong moves in the cloud. The company turned in an outstanding performance in the first quarter, delivering substantial growth in cloud and cloud-related products. In addition, SAP is progressing well in the customer relationship management space, providing tough competition to the likes of Salesforce.com and Oracle .
Despite such positives, SAP shares are down more than 10% this year, giving investors a chance to buy the stock on the cheap. Let's take a look at the various reasons why SAP looks set for long-term growth.
Strong results and a stronger future
SAP delivered strong results in the first quarter as its revenue exceeded its guidance range. The company witnessed considerable growth in all areas. Cloud subscriptions increased 38%, ahead of expectations. In fact, its cloud business has attained an annual revenue run rate of close to $1.5 billion, growing 1.5 times faster than its closest competitor.
The company is gaining traction with the adoption of HANA, its real-time business platform. It now has around 1,000 customers for SAP Business Suite on HANA, which is a remarkable achievement considering that the platform is just a year old. SAP is continuously innovating its core products, and this has led to solid growth in its customer base. The company has more than 36 million cloud users, and it attributes this success to the fact that it offers wide-ranging functionality, allowing companies to run their entire businesses on its platform.
SAP is also bringing Ariba and HANA together. Ariba is a software and information technology services company acquired by SAP in 2012. Ariba's "Spend Visibility" solution is now running on HANA, and switched over five million users instantaneously with zero network downtime. Now, companies on this network will be able to analyze large amounts of spending data in fractions of a second. The company is also expanding its HANA Enterprise Cloud data center to new locations, including China, Australia, Russia, Canada, Mexico, India, and Brazil.
Innovation, acquisitions, and partnerships to drive growth
SAP's business model is different from its peers as it is more focused on innovation. According to management, it provides highly customized solutions based on customers' needs and preferences, in a better way than its peers. SAP has helped retailers with omni-channel platform, banks with corporate-to-bank connectivity, insurance companies with international regulatory compliance, and many more to make their businesses more efficient.
The company claims to provide the most comprehensive end-to-end HR Cloud solution. To enhance its ability in this area, it has acquired Fieldglass, which will allow the company to tap the fast-growing market for flexible workforce management.
In addition, SAP's acquisition of Hybris is helping it gain traction in the omni-channel e-commerce platform. Now, companies can cross-sell and up-sell in real time, which was not possible earlier. As a result, diverse businesses, ranging from Max Mara Fashion to Boeing, are turning to Hybris to deliver state-of-the-art business-to-business commerce to maximize conversion and drive revenue rates.
Hybris also runs on HANA, which is one of the key growth drivers for the company. It enables customers to benefit from integration, be it an enterprise cloud, the public cloud, or on-premise solutions. Consequently, more and more companies are adopting HANA from several domains such as telecommunications, utilities, financial services, and retail.
Currently, SAP has more than 900 partners in its cloud ecosystem. It has partnered with Accenture to form the Accenture and SAP Business Solutions Group. In this group, experts from both companies will jointly develop industry-specific solutions powered by HANA. It has formed another similar combination of Adobe Marketing Cloud with the SAP Hybris Commerce Suite and the SAP HANA platform. This will redefine customer engagement and retention in the fast-changing and highly competitive consumer world.
SAP and the competition
SAP faces competition from Oracle and Salesforce, both of which are trying to tap the cloud space. Salesforce is growing at a rapid pace. In the previous quarter, the company recorded more than 200 transactions that were in seven figures or higher.
Driven by a strong deal activity, Salesforce increased its fiscal 2015 revenue guidance by $100 million to $5.3 billion. If the company attains this, it will represent an outstanding growth of 30% this year.
Oracle, meanwhile, is continuing with its strategy of acquisitions. The company recently made another big-ticket purchase, acquiring Micros Systems for more than $5 billion, its biggest buy since Sun Microsystems.
Micros makes hardware and software for the hospitality and retail industries, including technology used in point-of-sale cash registers. It has been an Oracle partner for around 15 years, so the acquisition should result in substantial synergies.
The bottom line
SAP's focus on innovation and the popularity of its HANA platform are key reasons why the stock looks like an enticing investment. In addition, SAP also makes some smart acquisitions to strengthen its position in the cloud. The company delivered strong results the last time, and looking at its prospects, it should continue doing well, making it a good buy on the drop.
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The article Why SAP AG's Weak Performance This Year Is a Buy Opportunity originally appeared on Fool.com.Sharda Sharma has no position in any stocks mentioned. The Motley Fool recommends Accenture and Salesforce.com. The Motley Fool owns shares of Oracle. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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