SAP, Europe's largest software manufacturer, has published its earnings for the fourth quarter of 2024, highlighting significant revenue growth even as net profits faced steep declines. Investors reacted to these mixed signals during trading on Tuesday, January 28, 2025, prompting discussions about the future direction of the company's stock.
During the fourth quarter, SAP reported revenue of €9.4 billion, marking an impressive 11% increase compared to the previous year. This growth was largely attributed to the company's successful pivot toward cloud computing, with cloud revenues surging by 27% to €4.71 billion. Notably, the adjusted operating profit before interest and taxes rose by 24% to €2.44 billion, easily surpassing analysts' expectations.
Despite the positive revenue figures, SAP's net profit fell sharply by 49% to €3.12 billion, leading some analysts and investors to express concern. The earnings per share also decreased from €5.20 to €2.65, surprising many stakeholders who anticipated steadier performance.
Christian Klein, SAP's CEO, emphasized the company's resilience amid the challenging environment. "We finished 2024 strong, benefiting significantly from the shift of our clients to cloud solutions. Over 50% of our cloud contract signings include artificial intelligence scenarios, showcasing our commitment to leveraging next-gen technologies for business growth," Klein stated during the earnings call.
Looking ahead, SAP's management has reaffirmed its ambitious mid-term targets, predicting substantial gains driven primarily by its cloud sector. For fiscal 2025, SAP aims to generate between €33.1 billion and €33.6 billion, reflecting growth of 11% to 13%. Its Cloud software revenue is projected to accelerate even more sharply, anticipating growth of 26% to 28%.
Analysts reacted positively to SAP's announcement with various firms, including Morgan Stanley, Baader Bank, Stifel, and BNP Paribas, reiterATING their buy ratings and target prices for SAP stock ranging from €230 to €295. Nevertheless, there was caution advised from some analysts, emphasizing the relatively high price-to-earnings (P/E) ratio currently standing at 44.8 compared to competitors like Oracle.
Investor sentiment remained buoyant as SAP stock soared to all-time highs of approximately €270 following the earnings report. Early trading saw the shares open 2.5% higher, underscoring strong market confidence, though some experts warned about overvaluation. A market analyst stated, "The current rally is significant, but investors should be cautious as the stock has reached overbought territory, as indicated by the Relative Strength Index (RSI) readings."
Control over operational efficiency has remained at the forefront of SAP’s strategy as it continues managing costs related to its extensive cloud transformation. Despite the challenges on the profit side, the long-term outlook remains optimistic, as the firm focuses on sustainable revenue streams from subscription-based cloud services, which now make up 81% of its total revenues.
Lower software license revenues, reflecting a decline of 18% (down to €683 million), were somewhat offset by resilient recurring income from cloud services. The overall revenue for SAP increased by 11% for the entire year, with the firm reaching €34.2 billion.
While the cloud business is undeniably strong, the sharp decline in net profits has raised questions about the sustainability of this growth. The challenges raised highlight the importance of closely monitoring market conditions going forward, especially as global economic factors come to play.
Investors are left with mixed feelings; the potential for available returns due to cloud revenue growth must be weighed against persistent pressure on profitability. Therefore, those considering buying shares might prefer to wait for potential downward adjustments to entry points, or look for market adjustments over the coming months.
After strong performance and high expectations, the outlook is dual-edged, with many now questioning whether SAP can maintain its upward momentum amid swelling challenges from competitors and market conditions. The combination of impressive cloud growth and troubling profitability makes SAP's position both promising and precarious.