Piper Sandler starts at SAP at Buy, highlights 'multiple tailwinds beyond 2030'

Piper Sandler initiated coverage on SAP with an Overweight rating and a €350 price target, citing the company's cloud transformation as a catalyst for earnings and valuation expansion. SAP's Cloud ERP business, growing at 34% year-over-year with a €17 billion run-rate, is expected to exceed 50% of total revenue this year, driving double-digit revenue growth and 15-20% annual free cash flow growth through 2030+. The brokerage highlights the large remaining on-premise ERP customer base, the impending end of ECC support, cross-selling opportunities, expansion into smaller enterprises, and data/AI monetization as key growth drivers.

Analysis

Piper Sandler has initiated coverage on SAP with an Overweight rating and a €350 price target, highlighting the company's cloud transformation as a significant catalyst for both earnings growth and valuation multiple expansion. SAP's Cloud Enterprise Resource Planning (ERP) segment is demonstrating robust momentum, achieving a €17 billion run-rate with 34% year-over-year growth, and is projected to constitute over 50% of total revenue for the first time this year. This shift is anticipated to enable SAP to sustain double-digit revenue growth and compound free cash flow at an annual rate of 15-20% through 2030 and beyond. Key growth drivers identified include the substantial opportunity in converting the approximately 60% of SAP's installed ERP base still on legacy on-premise systems to its cloud-based S/4HANA suite, a transition potentially unlocking €28 billion for the Cloud ERP segment, further spurred by the looming end of ECC support and increasing AI-driven data demands. Significant upside is also seen from enhanced cross-selling, with customers adopting four or more products having more than doubled to 23% since 2021, and 77% of the installed base representing further penetration opportunity. SAP's strategic push into the mid-market, aiming to access 400,000 partner-assigned accounts from 2025, and the monetization of its Business Data Cloud (BDC) through partnerships, which could add an incremental €1 billion and boost top-line growth by 1% within two years, are also pivotal. Despite historical underperformance relative to the broader software sector, SAP has outperformed in the last two years, and its next twelve months enterprise value-to-sales multiple has expanded to 8.2 times, with Piper Sandler asserting there is further room for growth compared to peers.

Key Decisions for Investors

• Investors should consider SAP's strong growth trajectory in its cloud business, supported by multiple catalysts including on-premise to cloud migration, cross-selling opportunities, and mid-market expansion, as outlined by Piper Sandler's bullish initiation.
• Monitor the pace of S/4HANA adoption and the success of new go-to-market initiatives, as these are critical to achieving the projected double-digit revenue and 15-20% FCF growth through 2030+.
• Evaluate SAP's current valuation in the context of its recent outperformance and expanded EV/S multiple, while noting Piper Sandler's view that further multiple expansion is possible relative to its software peers.