On Tuesday, BofA Securities updated its stance on SAP AG (ETR:SAPG) (NYSE: NYSE:SAP), increasing the price target to $200 from the previous $178, while reiterating a Buy rating for the stock. The adjustment comes following recent investor meetings with SAP's management and new information regarding the company's cloud revenue.
The firm's analysis of SAP's cloud growth, informed by the latest disclosures, has bolstered confidence in the software giant's ability to sustain double-digit revenue growth starting from 2025. Projections indicate that Cloud ERP will expand at a compound annual growth rate (CAGR) of 27% by 2027, with S4HANA, SAP's flagship product, growing at an even more robust rate of 34%, and the remainder at 22%.
SAP's cloud business is expected to represent 89% of the company's total cloud revenue and 60% of the group's overall revenue by 2027. This is anticipated to support a cloud revenue CAGR of 23% and a 10% increase in group revenue. Furthermore, BofA anticipates a significant improvement in SAP's EBIT margins, projecting an increase from 21% in 2023 to 28.5% in 2027.
The financial institution forecasts that the growth in cloud revenue will drive an EBIT CAGR of 19% and a free cash flow (FCF) CAGR of 21%. The analyst highlighted SAP's strong cloud momentum as a key factor underpinning the positive outlook and double-digit EBIT growth. Additionally, SAP's solid financial position, characterized by an unlevered balance sheet, is expected to provide the company with the flexibility for capital deployments. The analyst anticipates that SAP could potentially return more than €10 billion to shareholders by 2026 while maintaining a net cash positive status.
InvestingPro Insights
As SAP AG (NYSE: SAP) continues to capture the attention of investors and analysts with its promising cloud revenue prospects, real-time data from InvestingPro provides a deeper look into the company's financial health and market performance. With a robust Market Cap of $222.52B and a P/E Ratio of 33.25, SAP stands as a significant entity in the software industry landscape. The company's Gross Profit Margin for the last twelve months as of Q4 2023 is an impressive 72.43%, underscoring its efficiency in generating earnings relative to its revenue.
InvestingPro Tips indicate that SAP is trading at a low P/E ratio relative to near-term earnings growth, suggesting potential value for investors looking at earnings power. Additionally, the stock generally trades with low price volatility, providing a level of stability in investment portfolios. For those seeking more comprehensive analysis, InvestingPro offers a wealth of additional tips, with 13 more available for SAP, which can be accessed at InvestingPro SAP.
Investors eyeing SAP's recent performance will note the significant price uptick over the last six months, with a 40.35% total return, and a strong return over the last year at 66.42%. The company's track record of maintaining dividend payments for 33 consecutive years, coupled with a dividend yield of 0.85%, reflects its commitment to shareholder returns. Use coupon code PRONEWS24 to get an additional 10% off a yearly or biyearly Pro and Pro+ subscription, unlocking further insights that could inform your investment decisions.
This article was generated with the support of AI and reviewed by an editor. For more information see our T&C.