SAP Bears Wary of Waiting Amid Promised Shift to Cloud

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According to SAP SE, the short-term cost of moving toward cloud computing will pay off with long-term gains. In the interim, investors are wary.

Shares in the world’s biggest maker of business software plunged last month and are heading for the worst year since 2008, as the move to serve customers via Internet applications instead of computer-stored programs weighs on profit. Bearish options on the German firm rose to the highest level in more than two years relative to bullish ones, data compiled by Bloomberg show.

Investors have punished SAP’s stock as it struggles to catch up with rivals including Inc. and Workday Inc. on sales of cloud-computing tools. The shift means customers pay over time rather than at the start of a contract, hurting near-term profit. While the strategy may eventually benefit, forecasts for earnings before interest and taxes was disappointing, said Royal London Asset Management’s Neil Wilkinson.

“The market is struggling to model the financial impact of the transition to cloud revenues,” said Wilkinson, a London-based fund manager who owns SAP shares. “My main concern is the lack of visibility in forecasting EBIT in the short term given the shift.”

Stock Tumble

The stock declined 0.6 percent to 54.15 euros at 10:18 a.m. in Frankfurt. SAP has tumbled 13 percent this year, making it the sixth-worst performer in Germany’s benchmark DAX Index. Salesforce and Workday have rallied more than 10 percent.

SAP, which got 94 percent of 2013 sales from on-premise products and services, is taking steps to bolster cloud-based offerings. It agreed to buy Concur Technologies Inc. in September for $7.4 billion. SAP has said it won’t give up accelerating the shift to preserve margins.

The software maker last month cut its full-year operating-profit forecast to as much as 5.8 billion euros ($7.2 billion), down from an earlier maximum of 6 billion euros. New sales of traditional software licenses, an indicator of future revenue potential, fell 3 percent and missed analysts’ forecasts.

“We see profit warnings over the next two years during the move to cloud as legacy revenues fall faster than cloud-service revenues rise,” said Cyrus Mewawalla, an analyst at CM Research Ltd. in London. He has a sell rating on the stock.

High Skew

Contracts betting that SAP will decline 10 percent cost 9.2 points more than those wagering on a 10 percent increase, according to one-month options data compiled by Bloomberg. The price relationship known as skew rose Oct. 22 to the highest level since June 2012.

“At the starting phase of the cloud business, our margins will be lower than if we were on-premise only,” said Daniel Reinhardt, a spokesman for SAP, by phone from Frankfurt. “Today, 25 percent of our new business comes from cloud. Long term, we can plan out revenues a lot better with the cloud than on-premise.” Reinhardt declined to comment on the options trading.

Jyske Bank A/S’s Robert Jakobsen said investors should wait out the earnings rough spot as SAP’s recent decline make the shares attractive. The shares trade at 15.6 times estimated earnings, compared with 18.6 times at the end of last year, data compiled by Bloomberg show.

“Investors have misunderstood the reason for the company’s earnings downgrade,” Jakobsen said by phone from Silkeborg, Denmark. “Switching from license-based to cloud may reduce revenue now but they’ll get it back. After a couple of years, they’ll get more profit from the same customers.”

Three of the four most-owned SAP contracts were bearish. Bets that SAP will fall 4.5 percent by Dec. 19 had the biggest ownership.

“The challenge is that while their cloud business is growing fast, it’s not a big part of their overall revenue,” Patrick Walravens, an analyst at JPM Securities LLC, said by phone from San Francisco.“What they’re doing is absolutely the right thing, but it’s painful in the short term.”