SAP SE (SAP +1%) has reached 52-week highs, driven by a strong Q3 performance. The enterprise software provider continues to benefit from the growing demand for AI and its ongoing cloud transformation over the past four years. The quarter saw new and existing customer wins, along with the completion of a $1.5 billion acquisition of WalkMe, a tech firm specializing in digital adoption platforms.
Key highlights from SAP's Q3 results:
- SAP reported a mild increase in both top and bottom lines, with adjusted EPS up 6% year-over-year and revenue up 9%. Cloud revenue grew by 25%, reflecting its success in transitioning legacy clients to the cloud.
- AI significantly contributed to SAP's cloud revenue growth. CEO Christian Klein noted that about 30% of cloud order entries involved AI use cases. SAP exceeded its goal of 100 AI use cases, supported by its Gen AI Hub, leading to a more than threefold increase in partner consumption and over fourfold growth in customer consumption.
- While there are concerns about AI's impact on margins as usage scales, SAP does not foresee margin risks in 2025. Beyond that, the effect on gross margins remains uncertain due to fluctuating prices, though AI is expected to be margin accretive.
- SAP has modestly raised its cloud and software revenue forecast for FY24, supported by its software suite. The last quarter is crucial as it typically accounts for the largest portion of annual results and sets the stage for FY25.
SAP's consistency in 2024, leveraging the AI trend, has led to solid quarterly reports. The Q3 results set up Q4 for another strong performance. However, with shares at all-time highs, the company is in a priced-to-perfection zone, where even minor issues in the critical final quarter could trigger significant selling pressure.
