Magellan Stock Story: SAP

Funds Management

by Magellan Financial Group

Enterprise software is home to some of the best business models in the world, and nowhere is this more evident than in Enterprise Resource Planning (ERP). ERP is the central nervous system of the enterprise, powering mission-critical processes across an organisation in a seamless suite of integrated software. Companies simply cannot run without it.

SAP is the market leader in ERP and related application software, formed through decades of expertise since its founding in 1972. This leadership is evident in the fact that 99 of the 100 largest companies in the world run SAP, and 87% of total global commerce volume ($46 trillion) is generated by SAP customers. Its solutions span many functional areas including finance, procurement, human resources, and warehouse and transportation management.

The critical role ERP plays for enterprise customers to function and differentiate their business processes confers strong pricing power and customer retention rates for SAP. Its comprehensive product portfolio provides ample opportunity to expand its footprint both within its customer base and with new customers, and this opportunity extends as these customers expand and encounter greater complexity. SAP solves complexity.

SAP is now embarking on the largest business model shift in its history to support its customers as they digitally transform their businesses to the new cloud paradigm. Having undergone a period of transition with new management, restructuring, and divestment of non-core businesses, the company is now at an early phase of renewed growth momentum. The majority of SAP’s customer installed base have yet to undergo or complete their cloud transitions, and this will provide significant runway for sales growth and margin expansion in the years to come.

This momentum is evident in SAP’s cloud revenue, which has tripled over the last five years and now represents half of its €27 billion in total software revenue, within which its most strategic cloud businesses grew over 50% in 2023 alone. The total value of contracted deals, a forward-looking indicator, continues to grow as does the size of individual deals as projects develop. The predictability of SAP’s revenue stream will keep improving as cloud becomes a greater share of the business and the company’s historical reliance on traditional licence sales diminishes.

ERP and related application software have been around for decades, but the innovation pipeline is arguably more exciting than it has ever been. Cross-border regulatory complexity is rising. Supply chains are becoming more sophisticated. Emissions-reporting frameworks require new ways to track and manage climate-related disclosures. The use of Artificial intelligence (AI) has accelerated.

Rapid advancements in AI offer the potential to solve new problems or operate more effectively, and companies are increasingly looking towards leveraging it. The rich proprietary data flowing through ERP systems make SAP particularly well suited to deliver these solutions. Integrating AI can help companies extend workflow automation, enhance predictive analytics, and improve decision-making.

These represent multi-year opportunities for SAP to capture additional value from innovation, all while driving further operating efficiencies. We believe the company’s journey is only getting started.

Adrian LuInvestment Analyst
Sources: Company filings.

Important Information: This material has been delivered to you by Magellan Asset Management Limited ABN 31 120 593 946 AFS Licence No. 304 301 (‘Magellan’) and has been prepared for general information purposes only and must not be construed as investment advice or as an investment recommendation.  This material does not take into account your investment objectives, financial situation or particular needs. This material does not constitute an offer or inducement to engage in an investment activity nor does it form part of any offer documentation, offer or invitation to purchase, sell or subscribe for interests in any type of investment product or service. You should obtain and consider the relevant Product Disclosure Statement (‘PDS’) and Target Market Determination (‘TMD’) and consider obtaining professional investment advice tailored to your specific circumstances before making a decision about whether to acquire, or continue to hold, the relevant financial product. A copy of the relevant PDS and TMD relating to a Magellan financial product may be obtained by calling +61 2 9235 4888 or by visiting www.magellangroup.com.au.

Past performance is not necessarily indicative of future results and no person guarantees the future performance of any financial product or service, the amount or timing of any return from it, that asset allocations will be met, that it will be able to implement its investment strategy or that its investment objectives will be achieved. This material may contain ‘forward-looking statements’. Actual events or results or the actual performance of a Magellan financial product or service may differ materially from those reflected or contemplated in such forward-looking statements.

This material may include data, research and other information from third party sources. Magellan makes no guarantee that such information is accurate, complete or timely and does not provide any warranties regarding results obtained from its use. This information is subject to change at any time and no person has any responsibility to update any of the information provided in this material.  Statements contained in this material that are not historical facts are based on current expectations, estimates, projections, opinions and beliefs of Magellan. Such statements involve known and unknown risks, uncertainties and other factors, and undue reliance should not be placed thereon. No representation or warranty is made with respect to the accuracy or completeness of any of the information contained in this material. Magellan will not be responsible or liable for any losses arising from your use or reliance upon any part of the information contained in this material.

Any third party trademarks contained herein are the property of their respective owners and Magellan claims no ownership in, nor any affiliation with, such trademarks.   Any third party trademarks that appear in this material are used for information purposes and only to identify the company names or brands of their respective owners. No affiliation, sponsorship or endorsement should be inferred from the use of these trademarks. This material and the information contained within it may not be reproduced, or disclosed, in whole or in part, without the prior written consent of Magellan.


Subscribe to our Daily Newsletter?

Would you like to receive our daily news to your inbox?