On Wednesday, KeyBanc initiated coverage on SAP AG (ETR:SAPG) (NYSE: NYSE:SAP), assigning the stock an Overweight rating and setting a price target of $230. The firm highlighted SAP's significant transition into cloud services, noting that the company has now moved 44% of its revenue to the cloud following its RISE and GROW initiatives. This shift is expected to lead to a rapid increase in cloud and overall revenue growth, with cloud revenue projected to grow nearly 25% annually over the next two years.
SAP's cloud revenue is forecasted to reach €21 billion by 2025, which would account for 57% of its total revenue, up from just under 44% in 2023. KeyBanc also pointed to the potential for margin improvement, owing to a corporate restructuring that is anticipated to affect approximately 8,000 employees. While acknowledging that labor laws in Germany may complicate and increase the cost of such restructuring efforts compared to those in the U.S., the firm still expects benefits to SAP's cash flow generation after a temporary step-down in 2024.
The financial institution believes that SAP's current enterprise value to free cash flow forecast (EV/FCFF) ratio of 31.5 times its 2025 estimate presents an attractive entry point when compared to its large-cap peers. This valuation is perceived as a discount relative to the sector, considering SAP's fundamental profile. The analysis supports the view that SAP, despite being a latecomer to the cloud market, has made significant strides and is poised for further growth and efficiency gains.
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