SAP Loses $35 Billion in Market Value After Dropping Mid-Term Margin Targets

By Mariliana Fotopoulou Monday, October 26, 2020

Shares of SAP (ETR: SAP), the German software-maker, crashed about 20% today after the company abandoned its mid-term margin targets and doubled-down on the planned shift to cloud computing.

The tech giant also warned investors that its operations would take longer-than-anticipated to recuperate from coronavirus.

Today’s aggressive fall in SAP share price slashed around $35 billion off the company’s market capitalization and marked the largest single-day decline in the last 24 years.

“At an Inflection Point” — CEO

SAP saw its revenue fall by 4% in the third quarter, which prompted the software company to reduce its outlook for this year. It cited the reintroduction of lockdown measures in some countries, which have hurt its operations. Additionally, its worst-affected operations will take more than expected to bounce back.

When asked about the shift, SAP’s CEO Christian Klein said the value of the company’s services and products are more important than maximizing margins in the short run.

“We are at an inflection point,” Klein told investors in a conference call.

“I am not willing to trade value to our customers for short-term margin [optimization].”

The move comes after a year of disorder in SAP, following the departure of the previous Chief Executive Bill McDermott and an attempt of dual leadership, after which Klein became the only CEO of the company.

During that time of turmoil, the COVID-19 outbreak started to affect the businesses significantly. However, SAP managed to uphold its mid-term targets that included the growth of margins by a percentage point a year through 2023.

The pivot will drop a strategy that was developed “once upon a pre-COVID lifetime,” said industry analyst Josh Greenbaum at EAConsult.

“I think it’s a good time to take the margin hit of transitioning to the cloud, and clearly the pandemic economy is helping justify the move,” Greenbaum added.

The spin also means that profit margins will decline in the following three years, but after that, headwinds will become tailwinds, said SAP’s CFO Luka Mucic.

Doubling-down on cloud computing is expected to increase the company’s cloud revenue by 200% to 22 billion euros ($26 billion) by the year 2025. It will also outdo conventional license sales that have been SAP’s goldmine for years.

Following today’s results, US investment banking company JP Morgan slashed SAP’s price objective to €120 per share from €160 and changed its rating to “Neutral” from “Overweight.”

SAP Acquired Emarsys Recently

A few weeks ago, SAP announced its plan to acquire Austrian cloud marketing software provider Emarsys for an undisclosed amount. The acquisition of Emarsys, which secured more than $55 million as per PitchBook data, provides SAP with user personalization technology.

As resurgence in coronavirus cases continues to restrict access to physical stores, there’s been a surge in demand for personalization as people are increasingly shopping online and companies need to match their needs.

Buying Emarsys will offer SAP an omnichannel marketing solution they claim is developed to deliver messages to consumers anywhere, via email, mobile, social, SMS, and the web.

Brent Leary, the co-founder and Partner of CRM Essentials LLC, thinks that the acquisition of Emarsis emphasizes that SAP is still very much in the business.

“This illustrates that SAP is serious about CX and competing in a highly competitive space. Emarsys adds industry-specific customer engagement capabilities that should help SAP CX customers accelerate their efforts to provide their customers with the experiences they expect as their needs change over time,” Leary said.

Given that it’s essentially an ERP company, SAP has been geared toward back-office operations. However, Bob Stutz, president of SAP Customer Experience, thinks that buying Emarsys will help bring back-office and front-office operations together.

“With Emarsys technology, SAP Customer Experience solutions can link commerce signals with the back office and activate the preferred channel of the customer with a relevant and consistently personalized message, allowing customers the freedom to choose their own engagement,” Stutz stated.

Apart from waiting for regulatory approval, the deal is expected to complete in the current quarter.

Summary

SAP said it is ready to accelerate its strategic pivot to cloud computing after abandoning its medium-term profitability goals. The company’s stock plummeted by almost 20% on the news, its biggest one-day drop in 24 years.

About the Author


Headshot for author Mariliana Fotopoulou

Mariliana has an MSC in consumer analytics and business strategy. She has a special interest in fast-moving industries and big data.

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