The Gemini Report – Investment Deep Dives

SAP SE (SAP) Investment Research Analysis

All investment deep dives on this site have been written by Google Gemini with light human editing. Nothing on this site constitutes investment advise. All materials on this site are for informational purposes only.

The Gemini Report - Investment Deep Dives
The Gemini Report – Investment Deep Dives
SAP SE (SAP) Investment Research Analysis
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1. Company Overview & Business Model

SAP SE is a German multinational software corporation that develops enterprise software to manage business operations and customer relations. The company is the world’s leading enterprise resource planning (ERP) software vendor and a market leader in enterprise application software.1 Headquartered in Walldorf, Germany, SAP serves over 440,000 customers in more than 180 countries, with a significant footprint among both large multinational corporations and small and medium-sized enterprises (SMEs).3

Core Operations & Revenue Streams

SAP’s business operations and revenue generation are structured around three primary streams: Cloud, Software Licenses & Support, and Services. The ongoing strategic transformation of the company is evident in the shifting composition of these streams.

  • Cloud: This segment has become the company’s primary growth engine and strategic focus. It encompasses a broad portfolio of Software-as-a-Service (SaaS) and Platform-as-a-Service (PaaS) solutions, including the flagship Cloud ERP Suite and the Extension Suite, as well as Infrastructure-as-a-Service (IaaS) offerings.4 For the fiscal year 2024, Cloud revenue reached €17.14 billion, representing a substantial 25% year-over-year increase (26% at constant currencies). This rapid expansion has positioned the cloud business to contribute approximately 50% of SAP’s total revenue, a milestone reflecting the success of its strategic pivot.5 The financial model for this segment is based on recurring subscriptions, providing a more predictable and stable revenue flow.
  • Software Licenses & Support: This represents SAP’s traditional, on-premise business, which has historically been the cornerstone of its financial strength. The segment is composed of two parts: upfront software license sales and recurring software support fees. In line with the company’s cloud-first strategy, revenue from new software licenses is in a managed, structural decline, falling 21% in FY 2024 to €1.40 billion.5 However, the associated software support revenue, derived from maintenance contracts on the vast installed base of on-premise software, remains a significant and highly profitable contributor. While this support revenue stream is expected to erode over time as customers migrate to the cloud, it continues to generate substantial cash flow that helps fund the company’s transformation.6
  • Services: This segment includes a range of professional services, such as consulting for the implementation of both cloud and on-premise software, as well as premium support offerings. This revenue stream is project-based and more variable than the recurring cloud and support segments. In the fourth quarter of 2024, the Services segment generated €1.11 billion, showing modest growth and supporting the broader ecosystem around SAP’s core product offerings.5

The Strategic Cloud Transformation

The central narrative for SAP over the past several years has been its deliberate and large-scale transition from a traditional on-premise software vendor, reliant on large, upfront license deals, to a modern cloud company with a recurring, subscription-based revenue model. This transformation is designed to enhance the quality and predictability of its revenue, foster deeper customer relationships through continuous service delivery, and position the company for long-term, sustainable growth.

A key metric that quantifies the success of this transition is the “share of more predictable revenue.” This figure, which combines cloud revenue and software support revenue, has shown a consistent upward trend, climbing to 83% of total revenue in FY 2024. This is a significant increase from 81% in 2023 and 72% in 2020, providing clear evidence that the strategic shift towards a recurring model is taking hold and creating a more resilient financial foundation for the company.5 The business model is increasingly built around flexible subscription management, allowing for personalized offerings and pay-per-use models that are designed to grow recurring revenue streams and enhance customer loyalty.9

A critical dynamic shaping SAP’s near-term profitability is the transition away from its legacy, high-margin software support business. As customers migrate to the cloud via programs like ‘RISE with SAP’, they cease paying the lucrative support fees—which historically carry gross margins often exceeding 90%—and begin paying subscription fees for cloud services. These cloud services, while growing rapidly, currently operate at lower gross margins (the non-IFRS cloud gross margin was 75.2% in Q2 2025) due to ongoing investments in infrastructure and hosting.4 This mix shift creates a temporary but significant headwind, producing a “J-curve” effect on overall corporate margins. The trajectory of SAP’s long-term profitability, therefore, hinges not just on the rate of cloud revenue growth, but critically on the pace of cloud gross margin expansion. The market appears to anticipate a successful navigation of this challenge, with analyst consensus forecasts projecting a steady expansion in operating margins from approximately 27.8% in 2025 to over 31% by 2028, indicating an expectation that the cloud business will achieve the necessary scale and efficiency to drive overall margin accretion in the coming years.6

Dominant Position in Enterprise Applications

SAP’s market position is anchored by its historical and ongoing leadership in the ERP software market, where it is widely recognized as the global standard-setter.1 Independent industry analysis consistently affirms this leadership. According to Gartner, SAP holds the number one market share in global ERP software.3 Research from IDC in 2023 further solidified this standing, placing SAP in a statistical tie with Salesforce for the top position in the broader enterprise applications market, with both companies accounting for a significant portion of the industry’s worldwide revenues.11

While ERP forms the company’s core, SAP’s product portfolio is extensive, covering a wide range of business functions. The company holds leading or dominant positions in numerous sub-segments of the enterprise application market. Based on customer count, SAP is a leader in Financial Applications, Human Capital Management (HCM), Sourcing & Procurement, Supply Chain Management (SCM), and Distribution Management. This broad and deep market penetration across critical business functions underscores the integral role SAP’s software plays in the global economy.12

2. Industry Dynamics & Market Position

SAP operates within the vast and dynamic global enterprise software market. The industry is characterized by strong secular growth tailwinds, intense competition from both established technology giants and nimble cloud-native specialists, and significant technological disruption driven by trends like artificial intelligence and automation.

Global Enterprise Software Market

The market for enterprise software is large, growing, and undergoing a fundamental shift toward cloud-based delivery models. Recent market studies project the global enterprise software market size in the range of approximately $251 billion to $280 billion for 2024-2025.13 The outlook is for robust expansion, with a forecasted compound annual growth rate (CAGR) of between 11.7% and 12.1% through the next decade, potentially reaching over $760 billion by 2034.13

This growth is propelled by several key drivers. The overarching trend of digitalization continues to compel organizations worldwide to invest in software to automate processes, improve efficiency, and enhance competitiveness. The increasing demand for data-centric solutions to inform business decisions is a major catalyst, as is the structural shift to hybrid work models, which has accelerated the adoption of cloud-based collaboration and management tools.14

Within this market, specific segments show distinct growth trajectories:

  • By Deployment: The cloud segment is the clear engine of growth, with a predicted CAGR of 13.9%, significantly outpacing the on-premise segment. This reflects the benefits of lower upfront costs, greater flexibility, and continuous innovation associated with SaaS models.13
  • By Software Type: The ERP segment, SAP’s core market, remains a critical and growing area, with a projected CAGR of 10.9% as organizations continue to modernize their core operational systems.13

Competitive Landscape

SAP faces a formidable and multifaceted competitive landscape, with threats emerging from various angles. The company’s primary competitors include established technology titans and specialized, high-growth cloud vendors.16

  • The Oracle Rivalry: The most direct and historically significant competitor to SAP is Oracle. The rivalry is particularly intense in the core ERP and database markets. Recent data indicates that this competition has tightened considerably, representing a major challenge to SAP’s long-held dominance. A 2025 industry report suggested that Oracle’s annual ERP revenue of $8.7 billion (representing a 6.63% market share) had narrowly surpassed SAP’s $8.6 billion (a 6.57% share).19 This shift highlights the competitive traction gained by Oracle’s cloud-native Fusion ERP suite, which presents a direct alternative to SAP’s S/4HANA for customers evaluating a move to the cloud.20
  • Cloud-Native Specialists: A different category of threat comes from “best-of-breed” vendors who were “born in the cloud” and specialize in specific business functions. Salesforce is the dominant force in Customer Relationship Management (CRM), Workday is a leader in Human Capital Management (HCM), and ServiceNow excels in IT Service Management (ITSM). These companies challenge SAP’s integrated suite strategy by offering highly specialized, user-friendly solutions that can be adopted for individual business needs. This creates a risk that customers may choose to “peel off” certain functions to these specialists, even while retaining SAP for their core ERP system.
  • Hyperscale Cloud Providers: While also partners, major cloud infrastructure providers like Microsoft Azure, Amazon Web Services (AWS), and Google Cloud are increasingly moving up the software stack and offering their own enterprise applications and data analytics tools, creating another layer of competition.

Competitive Moats & Switching Costs

SAP’s durable competitive advantage, or “economic moat,” is primarily built on the exceptionally high switching costs associated with its core ERP products.22 This creates a powerful vendor lock-in effect that makes its customer base remarkably sticky.

ERP systems are not merely applications; they are the central nervous system of an enterprise, deeply embedded into every critical operational and financial process, from accounting and supply chain management to manufacturing and human resources. Migrating from an established SAP ERP system to a competitor’s platform is a monumental undertaking fraught with risk, cost, and disruption. The costs extend far beyond the new software license fees and include:

  • Implementation and Consulting Fees: Multi-year, multi-million dollar engagements with systems integrators are typically required.
  • Infrastructure Overhaul: Significant investment in new hardware or cloud infrastructure is often necessary.
  • Data Migration: The complex and risky process of transferring decades of business-critical data to a new system.
  • Employee Retraining: The entire organization must be retrained on new systems and processes, leading to a temporary loss of productivity.
  • Business Disruption Risk: The potential for a failed or delayed implementation to severely disrupt core business operations, such as the ability to ship products or close the financial books, is a major deterrent.

The magnitude of these costs is substantial. One study highlighted that the total cost of installing an ERP system like SAP can be as much as eleven times the initial purchase price of the software, underscoring the immense investment that locks customers into the ecosystem.23 This makes the decision to switch suppliers a rare and strategically critical event, affording SAP a highly resilient and predictable revenue base from its installed customers.

The nature of this competitive moat, however, is undergoing a subtle but important evolution. While the cost of a full “rip-and-replace” of the core ERP system remains a formidable barrier, the industry-wide shift to more open, API-driven cloud architectures is lowering the barriers for integrating best-of-breed solutions at the periphery of the core system. This dynamic presents both an opportunity and a threat. On one hand, SAP’s own Business Technology Platform (BTP) embraces this openness, allowing the company to foster a more flexible and powerful partner ecosystem.24 On the other hand, this same openness makes it technically easier for a customer running SAP’s S/4HANA to integrate a competing CRM from Salesforce or an HCM system from Workday, rather than purchasing SAP’s equivalent offerings. Consequently, while the central financial ledger—the “single source of truth”—is likely to remain securely locked in with SAP, the company now faces more intense and direct competition for every adjacent application module. This elevates the importance of continuous product innovation and competitive feature sets in areas like supply chain, procurement, and human resources, as the protective effect of the core ERP lock-in is less potent in these surrounding domains.

3. Financial Performance & Metrics

A review of SAP’s financial performance over the last five years reveals a company in the midst of a profound strategic transformation. The headline numbers reflect the challenges and successes of shifting from a legacy on-premise model to a cloud-centric, recurring revenue business. This transition has had a significant impact on revenue composition, profitability margins, and cash flow generation.

5-Year Historical Performance

An analysis of SAP’s consolidated financial statements from 2020 through 2024 illustrates the clear pivot to the cloud.

  • Revenue Trajectory: Total revenue has demonstrated steady growth, increasing from €27.3 billion in 2020 to €34.2 billion in 2024. This top-line expansion has been exclusively driven by the Cloud segment, which more than doubled its revenue from €8.1 billion to €17.1 billion over the same period. In contrast, the legacy Software Licenses & Support segment has seen its contribution decline, reflecting the strategic de-emphasis on upfront license sales.8
  • Profitability Dynamics: The impact of the transition is most visible in the company’s profitability metrics. On an IFRS basis, Operating Profit has declined from €6.6 billion in 2020 to €4.7 billion in 2024. This compression is a direct result of two main factors: the margin dilution from the shift to the cloud model and significant one-time restructuring expenses, which amounted to €3.1 billion in 2024 alone.5 A more representative view of underlying operational health is provided by the Non-IFRS Operating Profit, which excludes these items. This metric has remained more stable, indicating that the core business continues to perform well through the transition.8

The following table provides a five-year summary of SAP’s key financial metrics, highlighting the trends discussed.

Metric20202021202220232024
Total Revenue€27,343€26,953€29,520€31,207€34,176
Cloud Revenue€8,080€8,701€11,426€13,664€17,141
Software Licenses & Support Revenue€15,148€14,660€13,965€13,264€12,689
Services Revenue€4,110€3,592€4,128€4,283€4,346
% Predictable Revenue72%75%79%81%83%
IFRS Operating Profit€6,623€6,308€5,914€5,799€4,665
Non-IFRS Operating Profit€8,287€6,870€6,447€6,514€8,153
Non-IFRS Operating Margin (%)30.3%30.4%27.1%28.0%23.9%
Profit After Tax€5,283€5,376€1,708€5,964€3,150
Free Cash Flow€6,000€5,049€4,388€5,093€4,113
Note: Data in € Millions. Sources:.5 Non-IFRS Operating Margin for 2023 and 2024 calculated based on Non-IFRS Operating Profit and Total Revenue from provided sources.

Cloud Transition Progress & Key Metrics

The success of SAP’s strategy is best measured by a set of specific cloud-related key performance indicators (KPIs), which show strong and accelerating momentum.

  • Cloud Revenue Growth: The pace of cloud adoption is accelerating. In the second quarter of 2025, cloud revenue grew by a robust 24% as reported, and 28% at constant currency, marking an acceleration from prior periods.4 The primary engine of this growth is the core
    Cloud ERP Suite, which expanded even faster at 30% (34% at constant currency) in the same quarter, underscoring strong demand for SAP’s flagship cloud offering.4
  • Current Cloud Backlog (CCB): This metric represents contracted future cloud revenue that has not yet been recognized, serving as a crucial leading indicator of future growth. As of Q2 2025, the CCB reached a record €18.1 billion, an increase of 22% (28% at constant currency) year-over-year.4 The consistent, strong growth in the backlog provides a high degree of visibility and confidence in the company’s ability to meet its future cloud revenue targets.
  • S/4HANA Adoption: The migration of SAP’s vast installed base from legacy ECC systems to the new S/4HANA platform is a cornerstone of the long-term strategy. The data here presents a more complex picture. As of the end of 2024, an estimated 39% of the approximately 35,000 legacy ECC customers had purchased licenses for S/4HANA.29 While the absolute number of S/4HANA customers continues to grow, a notable portion of this growth (62% of new licensees in a recent quarter) comes from net-new customers rather than existing customer migrations.29 This suggests that while SAP is successfully winning new clients in the cloud, the migration of its core installed base is proceeding at a pace described as “steady but slow”.30

This dynamic presents a potential vulnerability in the investment thesis. While the overall cloud growth narrative is strong, it appears to be significantly bolstered by new customer acquisition through the ‘GROW with SAP’ program. The core thesis, however, relies heavily on the large-scale migration of the existing, high-value installed base via the ‘RISE with SAP’ program, which is catalyzed by the 2027 maintenance deadline for legacy software. The slower-than-anticipated pace of these migrations could imply that the revenue uplift from this core customer base may materialize more slowly than expected. This introduces a risk that some customers may explore third-party support options or even competitor solutions as the deadline approaches, potentially extending the timeline for SAP to realize the full financial benefits of the S/4HANA transition.

The table below tracks the progression of these key cloud metrics over recent quarters.

MetricQ2 2024Q3 2024Q4 2024Q1 2025Q2 2025YoY Growth (Latest Qtr)
Cloud Revenue€4.15N/A€4.71€5.06€5.1324% (28% cc)
Cloud ERP Suite Revenue€3.41N/A€3.95€4.42€4.4230% (34% cc)
Current Cloud Backlog (CCB)€14.80N/A€18.08€18.20€18.0522% (28% cc)
Note: Data in € Billions. ‘cc’ denotes constant currency. Q3 2024 and Q1 2025 revenue data not fully available in provided sources. Sources:.4

SaaS Metrics & Margin Potential

While SAP does not disclose certain standard SaaS metrics like Annual Recurring Revenue (ARR) or Net Revenue Retention (NRR), proxies and industry analysis provide valuable context.

  • Recurring Revenue: The “share of more predictable revenue” at 83% serves as a strong proxy for the recurring nature of the business model.5
  • Customer Retention: Given the high switching costs and enterprise focus, analysts estimate SAP’s gross customer retention rate is likely in the mid-90s, which is indicative of a very sticky customer base and a long average customer lifetime.34 For context, best-in-class Net Revenue Retention for large B2B SaaS companies, which includes upsells and expansion, is typically above 110-120%.35
  • Margin Expansion Potential: The cloud transition is dilutive to margins in the short term, but significant margin expansion is a key part of the long-term investment thesis. As the cloud business scales, economies of scale in infrastructure and operations are expected to drive profitability higher. Non-IFRS cloud gross margin has already shown improvement, reaching 75.2% in Q2 2025.4 Analyst consensus forecasts reflect this expectation, projecting non-IFRS operating margins to expand from 27.8% in FY25 to 31.6% by FY28.6

Cash Flow Generation

SAP has historically been a prolific generator of free cash flow (FCF). Recent performance has been temporarily impacted by significant cash outlays related to the company’s restructuring program. In FY 2024, FCF declined by 19% to €4.11 billion, largely due to €2.5 billion in restructuring payouts.5 For comparison, FCF was €5.09 billion in 2023 and €4.39 billion in 2022.8 Adjusting for these one-time transformation costs, the underlying cash-generating capability of the business remains robust. A return to strong FCF growth is anticipated as restructuring payments subside and the benefits of the cloud transition flow through to the bottom line.

4. Growth Strategy & Opportunities

SAP’s growth strategy is centered on completing its transformation into a cloud-first enterprise software leader. This strategy is multifaceted, involving the migration of its core installed base, the acquisition of new customers with cloud-native solutions, continuous innovation in high-growth areas like AI and data analytics, and targeted acquisitions to augment its technology portfolio.

Cloud Transformation Strategy: RISE & GROW

The company’s cloud strategy is executed through two primary go-to-market offerings, each tailored to a specific customer segment:

  • RISE with SAP: This is a comprehensive offering designed as a “Business-Transformation-as-a-Service” for SAP’s existing on-premise customers. It provides a guided path to migrate their core ERP systems to S/4HANA Cloud. The key value proposition of RISE is its simplification of the complex migration process by bundling software, infrastructure hosting (on a hyperscaler of the customer’s choice), and transformation services into a single, unified contract. This approach is intended to de-risk and accelerate the cloud journey for SAP’s large and valuable installed base. In the fourth quarter of 2024, RISE with SAP was a significant driver of new business, accounting for 58% of all S/4HANA deals.29
  • GROW with SAP: This offering was specifically designed to capture net-new customers, with a particular focus on the mid-market or SME segment. GROW provides a ready-to-run public cloud ERP solution that comes with pre-configured, industry-specific best practices. This allows for rapid deployment and a faster time-to-value, making it an attractive option for growing companies that need a scalable, modern ERP system without the complexity of a large-scale migration.29

S/4HANA Migration Opportunity

The most significant, discrete growth catalyst for SAP over the next several years is the migration of its legacy customer base from the SAP Business Suite 7 core application suite (commonly known as SAP ECC) to the next-generation S/4HANA platform. SAP has announced that mainstream maintenance for ECC will end on December 31, 2027, with the option for customers to purchase extended maintenance at a premium until the end of 2030.42

This deadline creates a powerful forcing function, compelling thousands of customers to make a strategic decision about their core enterprise systems. The migration to S/4HANA represents a substantial revenue uplift opportunity for SAP, as customers will transition from a relatively low-cost annual maintenance fee to a higher-value, comprehensive cloud subscription contract. Given that the average migration project for a midsize enterprise can take between 12 and 24 months, the 2027 deadline is creating an increasing sense of urgency within the customer base, which is expected to drive an acceleration in migration projects over the next two to three years.42

Innovation: Business AI & Business Technology Platform (BTP)

Innovation in next-generation technologies is a critical pillar of SAP’s growth strategy, with a primary focus on Business AI and the underlying Business Technology Platform.

  • Business AI and Joule: SAP is strategically embedding artificial intelligence capabilities across its entire application portfolio. The goal is to deliver “relevant, reliable, responsible Business AI” that automates repetitive tasks, provides predictive insights, and enhances the overall user experience.45 The flagship of this initiative is
    Joule, SAP’s natural-language, generative AI copilot. Joule is being integrated “everywhere and for everything” across the SAP suite, designed to allow users to get answers, generate content, and automate actions simply by asking questions in plain language.4 The market traction for this strategy is already evident; in Q2 2025, over half of SAP’s cloud order entry volume came from deals that included AI use cases.24
  • Business Technology Platform (BTP): BTP is SAP’s strategic Platform-as-a-Service (PaaS) offering. It serves as the unified technology foundation for the entire SAP cloud portfolio. BTP provides customers and partners with critical capabilities in four key areas: application development, automation, integration, and data & analytics. It is the platform that enables customers to extend and customize their SAP applications, build new innovations, and integrate SAP systems with third-party solutions. As a core component of the RISE with SAP offering, BTP is central to the company’s cloud and AI strategy, providing the technical underpinning for a flexible and intelligent enterprise.25

Expansion & Acquisition Strategy

Beyond the core transformation, SAP is pursuing growth through market expansion and a disciplined acquisition strategy. The company continues to focus on increasing its penetration in the SME market, developing new industry-specific solutions through its “Industry Cloud” initiative, and expanding its presence in emerging economies.41

SAP’s acquisition strategy is not focused on large, transformative deals but rather on targeted, “tuck-in” acquisitions of technology and software that augment its portfolio in critical, strategic areas. This approach is clearly illustrated by its most recent transactions:

  • LeanIX (September 2023): A market leader in Enterprise Architecture Management (EAM), LeanIX’s tools help companies plan and manage their IT landscape modernization.
  • WalkMe (intended acquisition, June 2024): A leader in Digital Adoption Platforms (DAPs), WalkMe’s software provides in-application guidance to help users navigate complex workflows.

These acquisitions are not merely about adding new features. They represent a sophisticated strategic move to control and monetize the entire customer transformation journey. An ERP migration is a moment of high vulnerability for an incumbent vendor, as it forces the customer to re-evaluate their entire technology stack. By acquiring LeanIX, SAP positions itself at the very beginning of that journey—the planning and architecture phase—allowing it to guide customers toward an SAP-centric solution from the outset. By integrating WalkMe, SAP addresses a major customer pain point—user adoption and change management—making the S/4HANA migration path appear safer and less disruptive than alternatives. This strategy effectively builds a “moat around the migration,” creating dependencies on SAP’s tooling before, during, and after the core ERP transition, thereby increasing customer stickiness and reducing the risk of churn to competitors during this critical period.50

5. Capital Allocation & Shareholder Returns

SAP’s capital allocation strategy reflects a disciplined balance between investing in its long-term growth and transformation while simultaneously delivering consistent and growing returns to its shareholders. This approach is enabled by the company’s strong balance sheet and robust underlying cash flow generation.

Historical Capital Deployment

The company’s use of capital has been focused on three main areas:

  1. Organic Investment (R&D): SAP consistently invests a significant portion of its revenue back into research and development to drive innovation in its core products, particularly in cloud and AI technologies.
  2. Inorganic Investment (Acquisitions): As detailed previously, SAP pursues a targeted acquisition strategy to acquire key technologies and capabilities that complement its portfolio.
  3. Restructuring: The company has undertaken significant transformation programs, such as the one initiated in 2024, which involve substantial cash outlays. These programs are designed to realign the company’s cost structure and resource allocation towards high-growth areas like the cloud, with restructuring payouts in 2024 amounting to €2.5 billion.4

Dividend Policy and History

SAP has a long and reliable track record of returning capital to shareholders through dividends, having made payments for 27 consecutive years.51 The company’s policy demonstrates a commitment to sustainable dividend growth.

  • For the fiscal year 2024, the Executive and Supervisory Boards proposed a dividend of €2.35 per share. This represented a 6.8% increase from the €2.20 per share paid for the prior year.51
  • The dividend has shown healthy growth over time, with a 3-year CAGR of 7.81% and a 5-year CAGR of 18.53%.51
  • The current forward dividend yield is approximately 0.9%.51 This relatively low yield is characteristic of a company that is still in a high-growth phase and is reinvesting a substantial portion of its earnings back into the business, positioning the stock more as a growth or “growth at a reasonable price” (GARP) investment rather than a pure income play.

Share Repurchase Programs

In addition to dividends, SAP actively utilizes share repurchase programs as a means of returning capital to shareholders and managing its share count.

  • In May 2023, the company announced a significant share repurchase program with an aggregate volume of up to €5 billion, scheduled to run until the end of 2025.4
  • This program is being executed in multiple tranches. The 2024-2025 execution includes a tranche of up to €1.25 billion (running from February to August 2024) and a subsequent tranche of up to €1.6 billion (running from September 2024 to April 2025).55
  • The primary stated purpose of these buybacks is to service future awards granted under share-based compensation plans. By settling these obligations with shares rather than cash, SAP aims to strengthen its employee ownership culture and more closely align the interests of its employees with those of its shareholders.56

Capital Structure and Returns on Capital

SAP maintains a robust and healthy capital structure, providing it with significant financial flexibility.

  • Balance Sheet: The company’s balance sheet is strong, with a low net debt to EBITDA ratio of just 0.2x reported for fiscal 2024.34 As of the end of 2024, SAP had shifted to a net liquidity position of €1.7 billion, a marked improvement from the net debt positions held in the preceding years, reflecting strong cash management.8
  • Returns on Capital: Return on Invested Capital (ROIC) has been a key area of focus for investors. In recent years, ROIC has been modest, hovering near the company’s cost of capital. This has been a direct consequence of the heavy investments required for the cloud transition, including building out data center infrastructure and funding restructuring efforts.34 A recent reported ROIC figure was 10.38%.57 A sustained improvement in ROIC in the coming years will be a critical indicator of the financial success of the company’s strategic transformation.

The company’s decision to pursue a dual strategy of both increasing its dividend and executing a multi-billion-euro share buyback program—all while absorbing significant cash costs from restructuring and continuing heavy investment in its cloud platform—serves as a powerful signal from management. Typically, a company under financial pressure would conserve cash by pausing such capital returns. SAP’s aggressive shareholder return policy indicates a high degree of confidence from the board and executive team in the company’s future free cash flow generation. It suggests that their internal forecasts project a significant acceleration in cash flow as the benefits of the cloud transition are realized and restructuring costs subside, allowing the business to comfortably fund its transformation, growth initiatives, and shareholder returns simultaneously.

6. Management & Corporate Governance

The quality of a company’s leadership and the soundness of its governance structure are critical factors in its ability to execute a complex, multi-year strategy. SAP is led by an experienced executive team and operates under a well-established European corporate governance framework.

Leadership Team & Strategic Vision

  • CEO Christian Klein: Christian Klein has been with SAP for over two decades, having started as a student in 1999. He was appointed co-CEO in October 2019 and became the sole CEO in April 2020. His tenure has been defined by a clear and decisive strategic pivot to make SAP a “cloud-first” company. He has been the primary architect and champion of the ‘RISE with SAP’ initiative, which is the cornerstone of the company’s cloud migration strategy. His overarching vision is to deliver an integrated, intelligent suite of applications, powered by Business AI, that enables customers to achieve end-to-end business process transformation in the cloud.4
  • Recent Executive Changes (2024-2025): The company has recently undergone a significant leadership reorganization, signaling a new phase in its transformation. This shuffle involved the departure of several high-profile executives, including the Chief Marketing Officer, Chief Revenue Officer, and Chief Technology Officer. In their place, SAP has made several key appointments, most notably promoting Sebastian Steinhaeuser, the former Chief Strategy Officer and a close advisor to the CEO, to the newly created Executive Board role of Chief Operating Officer (COO). The company also transitioned from a single CRO to a co-CRO structure, led by long-time SAP veterans Jan Gilg and Emmanuel Raptopoulos, to oversee global customer success.59
  • Execution Track Record: Under Klein’s leadership, the execution of the cloud strategy has yielded tangible results. The company has successfully and consistently accelerated its cloud revenue growth and, critically, its current cloud backlog, providing strong visibility into future performance. The recent Q2 2025 results, which featured accelerating total revenue growth and a significant surge in operating profit, demonstrate effective execution on both driving cloud momentum and implementing cost controls from the recent transformation program.24 However, the slower-than-desired pace of migration of the core ECC installed base to S/4HANA remains a key challenge and a point of scrutiny for investors monitoring the long-term success of the strategy.30

The recent leadership restructuring appears to be a strategic move by CEO Christian Klein to refine the company’s operating model for the next phase of its transformation. The creation of a new COO role, filled by a trusted strategic advisor, and the establishment of an “extended executive board” suggests a design aimed at centralizing high-level strategy while delegating and empowering broader operational execution. This structure allows the core Executive Board to focus on critical strategic imperatives like AI, portfolio management, and M&A, while the new COO and the extended board are tasked with driving the “AI-first, suite-first” strategy across SAP’s complex global organization. This is a classic organizational response to managing complexity and is likely intended to increase agility and improve the execution of the company’s ambitious long-term targets.

Corporate Governance Structure

SAP operates as a Societas Europaea (SE), a legal form for public companies in the European Union, and adheres to the German Corporate Governance Code. Its governance is based on a two-tier board structure, which separates management and oversight functions.2

  • Executive Board: This board is responsible for the day-to-day management and strategic direction of the company. It is led by the CEO, Christian Klein.62
  • Supervisory Board: This board’s primary functions are to appoint, advise, and supervise the Executive Board. In line with German co-determination law, the Supervisory Board is composed of an equal number of shareholder representatives and employee representatives. It currently comprises nine members elected by shareholders and nine members representing the company’s European employees, ensuring that a broad range of stakeholder interests are represented at the highest level of corporate oversight.63

The company demonstrates a commitment to shareholder-friendly policies through its transparent adherence to governance codes and its consistent track record of returning capital to shareholders via dividends and share repurchases.61

7. Risk Factors

An investment in SAP SE is subject to a range of risks inherent in its business, its industry, and the global macroeconomic environment. These risks can be broadly categorized into execution, competitive, technological, and market-related factors.

Cloud Transition & Execution Risks

The most significant risks facing SAP are directly related to the execution of its complex and ambitious cloud transformation.

  • Migration Timeline and Adoption Uncertainty: The core of SAP’s long-term value proposition rests on the successful migration of its vast on-premise ECC customer base to the S/4HANA Cloud platform. There is a tangible risk that this migration may proceed more slowly than the market anticipates. Customer hesitation, driven by the high cost, complexity, and perceived disruption of the migration process, could lead to delays, extending the timeline for SAP to realize the anticipated revenue and margin benefits.29
  • Margin and Profitability Pressure: The business model shift from high-margin, upfront software licenses and recurring support fees to an initially lower-margin cloud subscription model creates a near-term headwind for profitability. If the company fails to achieve the expected economies of scale in its cloud operations and expand its cloud gross margins as planned, overall corporate profitability could remain suppressed for a prolonged period.
  • Restructuring and Efficiency Gains: The company has undertaken a major transformation program, incurring significant restructuring costs with the expectation of future efficiency gains.32 There is a risk that these anticipated gains may not fully materialize or may take longer to achieve, which would negatively impact future operating margins and cash flow.

Competitive & Market Risks

SAP operates in a highly competitive and dynamic market, facing threats from both established players and new entrants.

  • Intensifying Competition: The competitive landscape has become more challenging. In the core ERP market, Oracle has emerged as a formidable cloud competitor, with some industry data suggesting it has closed the revenue gap with SAP.19 Simultaneously, cloud-native, best-of-breed specialists like Salesforce, Workday, and ServiceNow continue to exert pressure in their respective domains, creating a risk of market share erosion and increased pricing pressure for SAP’s non-ERP applications.20
  • Enterprise Spending Cyclicality: SAP’s revenue is directly linked to the capital expenditure and IT budgets of large enterprises globally. These budgets are inherently cyclical and sensitive to broader macroeconomic conditions. A global economic slowdown, heightened geopolitical uncertainty, persistent inflation, or disruptions in global trade could cause customers to delay or reduce their spending on large-scale digital transformation projects, leading to elongated sales cycles and a slowdown in SAP’s growth.24

Technology & Regulatory Risks

As a global technology leader, SAP is exposed to risks related to rapid technological change and a complex regulatory environment.

  • Technology Disruption: The pace of technological innovation, particularly in areas like artificial intelligence and data analytics, is relentless. There is a risk that new, disruptive technologies or platforms could emerge that challenge SAP’s established position. A failure to innovate and adapt to changing customer preferences and technological paradigms could render parts of its product portfolio less competitive over time.
  • Data Privacy and Security: SAP’s systems house vast amounts of mission-critical and sensitive data for the world’s largest corporations. The company is subject to a web of stringent data privacy regulations, such as the GDPR in Europe. Any significant cybersecurity breach or failure to comply with these regulations could result in substantial financial penalties, legal liability, and severe reputational damage.
  • Foreign Exchange Exposure: SAP is a global company that reports its financial results in Euros but generates a significant portion of its revenue and incurs expenses in other currencies, most notably the U.S. dollar. As a result, its reported financial performance is subject to material volatility from fluctuations in foreign exchange rates.65

The most significant, overarching risk to the investment thesis is the potential for a “value trap” scenario. This would occur if the 2027 ECC maintenance deadline proves to be a less potent migration catalyst than is currently priced into the stock. The slow adoption rate among the installed base to date suggests a degree of customer inertia and resistance. This opens the door for two primary threats: first, the emergence of a viable third-party support market for legacy ECC systems, which would allow customers to delay a migration decision indefinitely; and second, competitors like Oracle using the deadline as a compelling event to aggressively pitch their alternative cloud ERP solutions. If SAP is unable to significantly accelerate the migration of its installed base over the next one to two years, the market may begin to price in a higher probability of customer churn post-2027. Such an outcome would cap the company’s perceived long-term growth rate and invalidate the margin expansion thesis, potentially leading to a significant de-rating of the stock’s valuation multiple.

8. Valuation Analysis

The valuation of SAP SE reflects a complex interplay between its mature, cash-generative legacy business and its high-growth, transforming cloud business. The market is currently ascribing a premium valuation to the company, anticipating a successful execution of its cloud transition, which is expected to drive accelerated growth and margin expansion in the coming years.

Historical & Current Valuation Multiples

SAP’s valuation multiples have expanded significantly from their recent lows, indicating increased investor optimism about the company’s strategic direction.

  • Price-to-Earnings (P/E) Ratio: The company’s trailing twelve-month (TTM) P/E ratio has shown considerable volatility. As of July 2025, it stands at a relatively high level, in the range of 52x to 58x.17 This is notably above its 10-year historical average P/E of approximately 37x, suggesting that the stock is pricing in significant future earnings growth.66 The forward P/E ratio, based on consensus earnings estimates for the next fiscal year, is lower at around 41x, which reflects these growth expectations.57
  • Enterprise Value-to-Sales (EV/Sales) Ratio: This multiple, which is often used for companies undergoing a business model transition, has also seen a marked expansion. The TTM EV/Sales ratio recently peaked in the range of 8.3x to 9.4x. This represents a substantial premium to its 5-year median multiple of approximately 5.0x and is significantly higher than the trough of 3.7x seen in 2022.68

Peer Group Benchmarking

Comparing SAP’s valuation to its peers provides essential context. The appropriate peer group is a hybrid, including other large-cap legacy software vendors undergoing cloud transitions as well as high-growth, pure-play SaaS companies.

  • Versus Legacy Peers: When compared to its primary legacy competitor, Oracle, which has a TTM P/E ratio in the range of 50x-56x, SAP currently trades at a slight premium.70 This may reflect the market’s view that SAP’s S/4HANA migration cycle offers a more pronounced, albeit later, growth acceleration catalyst.
  • Versus High-Growth SaaS Peers: SAP trades at a significant valuation discount to the premier, cloud-native enterprise software companies. For example, ServiceNow and Workday command TTM P/E ratios well above 100x.66 This valuation gap is justified by their higher revenue growth rates, cloud-native business models, and lack of a dilutive legacy business.
  • Versus a Successful Transformer: A relevant comparison is Microsoft, which has successfully navigated its own massive transition to the cloud over the past decade. Microsoft currently trades at a TTM P/E ratio of around 39x.70 SAP’s current premium to Microsoft likely reflects the market’s expectation that SAP is at an earlier stage of its transformation-driven growth and margin expansion cycle, with more acceleration to come.

The table below provides a snapshot of SAP’s valuation multiples relative to its key competitors.

Company TickerMarket Cap ($B)EV/Sales (TTM)P/E (TTM)P/E (Forward)FCF Yield (TTM)
SAP SE (SAP)$3768.3x – 9.6x52x – 58x~41x~1.7%
Oracle (ORCL)$690N/A50x – 57xN/AN/A
Microsoft (MSFT)$3,800~13.9x~39xN/AN/A
Salesforce (CRM)$251N/A33x – 41xN/AN/A
Workday (WDAY)$60N/A~123xN/AN/A
ServiceNow (NOW)$199N/A~130xN/AN/A
Note: Data is approximate as of mid-2025, based on a range of provided sources. Market caps are in USD for comparison. N/A indicates data not consistently available in provided sources. Sources:.16

Sum-of-the-Parts (SOTP) Valuation Framework

Given SAP’s distinct business segments with vastly different growth and profitability profiles, a Sum-of-the-Parts (SOTP) valuation provides a useful analytical framework to assess the company’s intrinsic value.74 This approach involves valuing each business segment separately and then aggregating them.

  1. Cloud Business: This segment, with FY 2024 revenue of €17.1 billion and growth exceeding 25%, is the company’s crown jewel. It should be valued using valuation multiples comparable to other large-scale, high-growth SaaS businesses, such as a premium EV/Sales or EV/EBITDA multiple.
  2. Software Support Business: This segment, with a large and profitable revenue base but facing a slow, structural decline, is a classic “cash cow.” It should be valued on a cash flow basis, using a low multiple of its free cash flow or operating profit, similar to a mature, low-growth company.
  3. Software Licenses and Services: These segments generate non-recurring or lower-margin revenue. They would command the lowest valuation multiples in the analysis, likely based on a low single-digit multiple of revenue.

The SOTP framework often reveals that the consolidated valuation of a company like SAP may not fully reflect the intrinsic value of its high-growth cloud segment. The value of this segment can be “hidden” or diluted by the slower growth profile of the larger, legacy parts of the business. As the cloud business becomes a larger proportion of the overall revenue mix, its higher valuation characteristics should have a greater influence on the company’s total valuation.

Valuation Implications of Cloud Transition

The ultimate success of SAP’s cloud transition will be the primary determinant of its long-term valuation. If the company successfully completes the migration of its customer base and transforms into an enterprise with over 90% predictable revenue, sustained double-digit growth, and expanding operating margins, it would warrant a structural re-rating of its valuation multiples. In such a scenario, its valuation would likely move closer to that of the premier, at-scale pure-play SaaS companies. The current premium valuation reflects both the significant potential of this outcome and the considerable execution risk that remains.

9. Investment Thesis Considerations

Synthesizing the comprehensive analysis of SAP’s business model, market position, financial performance, and strategy allows for the construction of a balanced investment thesis, weighing the potential drivers of value creation against the significant risks.

Key Value Drivers & Catalysts (The Bull Case)

The primary arguments in favor of an investment in SAP are centered on the durability of its core business, a clear catalyst for growth, and the potential for significant financial improvement.

  • Durable Competitive Moat: SAP’s foundational strength lies in its deeply entrenched position within the core operations of thousands of the world’s largest enterprises. This position is protected by exceptionally high customer switching costs, which create a powerful and durable competitive moat. This provides a stable and captive customer base that serves as the foundation for the company’s ongoing cloud transformation.
  • The S/4HANA Migration Catalyst: The mandated end of mainstream maintenance for SAP’s legacy ECC software in 2027 acts as a powerful, non-discretionary spending catalyst. This deadline is expected to compel the vast majority of the remaining installed base to undertake a migration to the S/4HANA platform, unlocking a multi-year cycle of accelerated revenue growth as customers move to higher-value cloud subscription contracts.
  • Margin Expansion and Free Cash Flow Growth: The investment thesis anticipates a significant improvement in profitability and cash generation as the cloud transition matures. As the high-growth cloud business achieves greater scale and the benefits of recent restructuring programs are fully realized, there is substantial potential for operating margin expansion and a re-acceleration of free cash flow growth, particularly in the post-2025 period.
  • Embedded AI Opportunity: The strategic integration of Business AI, led by the Joule copilot, across SAP’s entire product suite represents a significant, incremental growth opportunity. AI-powered features can drive higher customer value, creating opportunities for up-selling and cross-selling premium tiers of service. This could increase the average revenue per user (ARPU) and further solidify SAP’s competitive position by making its integrated suite more intelligent and indispensable.

Durability of Competitive Advantages

The competitive advantage derived from the core ERP lock-in appears highly durable for the medium to long term. The sheer cost and risk associated with replacing a core financial system make it an unattractive proposition for most large enterprises. However, the competitive moat at the periphery—in non-ERP application areas like CRM or HCM—is facing more significant erosion from best-of-breed SaaS competitors. The long-term durability of SAP’s broader market leadership will depend on the success of its integrated suite strategy, leveraging the Business Technology Platform (BTP) to demonstrate that the value of a fully integrated SAP landscape outweighs the benefits of specialized third-party solutions.

Quality and Predictability of the Business Model

The fundamental quality of SAP’s business model is improving as a direct result of the cloud transition. The shift to a recurring revenue model has significantly enhanced the predictability and visibility of the company’s financial performance. The consistent growth in the share of predictable revenue, which now stands at 83% 5, combined with a massive and growing current cloud backlog of €18.1 billion 10, provides investors with a high degree of confidence in the company’s near-term revenue trajectory and reduces the historical volatility associated with large, upfront license deals.

Risk/Reward Profile

The investment profile of SAP presents a clear trade-off between potential reward and execution risk.

  • Potential Reward: A successful and timely execution of the cloud transformation could see SAP re-rated by the market as a premier, at-scale cloud software company. This would entail a business profile characterized by sustained double-digit growth, high and expanding margins, and strong free cash flow generation, which would likely justify a significant and permanent expansion of its valuation multiples.
  • Potential Risk: The primary risk is a failure to execute on this complex transformation. A slower-than-expected S/4HANA migration, persistent pressure on margins, or market share losses to nimbler competitors could lead to a “value trap” scenario. In this outcome, the anticipated improvements in growth and profitability fail to materialize, which would likely lead to a contraction of the stock’s currently elevated valuation multiples.

Key Milestones to Monitor

Investors should closely monitor several key performance indicators to track the progress and success of SAP’s strategy:

  • A tangible acceleration in the S/4HANA adoption rate among the legacy ECC installed base.
  • Continued growth in the Current Cloud Backlog at a rate of 25% or higher (at constant currencies).
  • Sustained, sequential improvement in the Non-IFRS Cloud Gross Margin, with a trajectory towards the high-70s to low-80s percentage range.
  • Clear evidence of operating leverage, demonstrated by Non-IFRS Operating Profit growth that consistently outpaces total revenue growth.

10. Key Questions to Address

This analysis culminates in several key questions that are critical for any potential investor to address before making an investment decision. The answers to these questions encapsulate the central tensions of the SAP investment case.

How sustainable is SAP’s market leadership position in ERP?

SAP’s leadership in the ERP market is sustainable in the medium term, primarily due to its vast, entrenched installed base and the formidable switching costs that protect it. However, this leadership is facing its most significant challenge in over a decade. The primary threat comes from Oracle’s cloud-native Fusion ERP suite, which has demonstrated strong momentum and, by some recent metrics, has matched or slightly surpassed SAP’s annual ERP revenue.19 The long-term sustainability of SAP’s number one position will be contingent on its ability to successfully migrate the majority of its user base to a technologically competitive S/4HANA Cloud platform and to defend against the erosion of its market share at the application layer from best-of-breed competitors.

What is the realistic timeline and financial impact of cloud transition completion?

The official timeline for the transition is anchored by the 2027 end-of-maintenance deadline for legacy ECC software, with an extended support option available until 2030. However, the current pace of migration among the installed base suggests that the full financial realization of this transition will likely extend beyond this period. The financial impact is expected to follow a multi-year cycle: near-term margin pressure due to the business model shift and restructuring costs, followed by an anticipated period of accelerating revenue growth (driven by subscription uplifts from migrating customers) and expanding operating margins (driven by cloud scale efficiencies) beginning in the 2025-2026 timeframe, an outlook that is reflected in current analyst consensus estimates.6

How will margins evolve as the business mix shifts to cloud?

The evolution of SAP’s margins is expected to follow a “J-curve” trajectory. In the current phase, margins are temporarily depressed by the transition from the highly profitable legacy software support model to the initially lower-margin cloud subscription model, as well as by the significant cash outlays for restructuring. As the cloud business achieves greater scale and operational efficiencies are realized, both cloud gross margins and overall corporate operating margins are expected to expand significantly. The company’s guidance and analyst forecasts point to a recovery in non-IFRS operating margins back towards, and potentially exceeding, the 30% level by the 2027-2028 timeframe.6

What are the biggest risks to the investment thesis?

The most significant risks to the investment thesis are predominantly execution-related. These can be summarized in three key areas:

  1. Migration Failure: A failure to significantly accelerate the S/4HANA migration of the core installed base ahead of the 2027 deadline, which could lead to a higher-than-expected rate of customer churn to third-party support or competitor platforms.
  2. Competitive Pressure: Intensifying competition from a resurgent Oracle in the core ERP space and from nimble, cloud-native players in adjacent application areas could erode SAP’s market share and pricing power, undermining the growth and margin assumptions of the transformation.
  3. Macroeconomic Headwinds: A severe and prolonged global economic downturn could cause enterprises to halt or delay large-scale, discretionary transformation projects, which would push out the entire timeline and financial realization of the cloud transition.

How does SAP compare to pure-play SaaS alternatives?

SAP presents a distinctly different investment profile compared to pure-play SaaS companies. It offers a more moderate growth profile but is built on a much larger, more established, and highly profitable business foundation. The investment case for SAP is a “transformation and value realization” story, rather than a pure, high-multiple growth story. Consequently, its valuation is significantly lower than that of SaaS leaders like ServiceNow or Workday, reflecting its different growth and margin profile. For an investor, SAP offers the potential for value creation through the successful execution of its strategic pivot and a subsequent re-rating of its valuation multiples to be more in line with at-scale cloud software peers. In contrast, an investment in a pure-play SaaS company is typically a bet on the continuation of high-growth and the maintenance of a premium valuation multiple.

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