Here's why SAP share price may crash to €208 soon

SAP's stock price has declined approximately 10% from its May peak, reaching a low of €247 despite strong recent financial results showing a 27% increase in cloud revenue and an 11% overall revenue increase. Technical analysis suggests a potential further decline to €232 and possibly €208, based on a double-top pattern formation, although management anticipates continued business growth, forecasting increased cloud revenue and a near doubling of free cash flow to €8 billion, potentially supporting further share repurchases.

Analysis

SAP SE's (SAP) share price has experienced a notable pullback of approximately 9.35% from its May peak of €273, reaching a low of €247, despite robust underlying business performance. The company's recent financial results demonstrated strength, with total Q1 revenue increasing 11% to €9 billion, surpassing estimates of €8.8 billion. This growth was significantly driven by its cloud segment, where revenue soared by 27% to nearly €5 billion, and its cloud ERP Suite revenue jumped 34% to €4.2 billion. SAP's cloud revenue growth outpaced larger competitors like Microsoft (20%) and Amazon (17%), and its cloud computing backlog expanded by 28% to €18.2 billion. Management maintains a positive outlook, forecasting cloud revenue between €21.6 billion and €21.9 billion for the year, and projecting free cash flow to nearly double to €8 billion from €4.2 billion in the previous year, aided by restructuring efforts. This strong FCF generation could support further shareholder returns, with a €5 billion share repurchase program initiated in 2023 expected to conclude in H2 2024, potentially followed by a new program. However, technical indicators present a contrasting, bearish short-term outlook. The stock has fallen below its 50-day moving average and appears to have formed a double-top pattern around the €273 resistance level, with a neckline identified at €208. This technical formation suggests a risk of further decline, with an initial target at €232 and a more significant downside potential towards €208 if the pattern holds. A move above €273 would invalidate this bearish technical view.

Key Decisions for Investors

• Investors should exercise caution in the short term due to the bearish technical signals, particularly the double-top formation suggesting potential further downside to €232 or even €208.
• Monitor the €273 level closely, as a break above this resistance would invalidate the current bearish technical outlook and could signal a resumption of the prior uptrend.
• Long-term investors may consider the disconnect between strong fundamental growth, particularly in cloud revenue and projected free cash flow, and the current share price pullback as a potential opportunity, contingent on technical support levels holding or a clear invalidation of the bearish pattern.
• Keep an eye on announcements regarding capital return policies, such as a new share repurchase program, which could be a catalyst given the anticipated strong free cash flow generation.