SAP defended at Morgan Stanley amid ’attractive’ valuation

Morgan Stanley reiterated its "Overweight" rating and "Top Pick" for SAP SE, maintaining a bullish long-term outlook despite near-term macro and technical pressures. The bank cites a highly attractive valuation (33x 2026 adjusted earnings, 17% EPS CAGR FY26-28) and an intact structural growth story driven by the global ERP upgrade cycle and essential cloud migration for AI integration. While forecasting a slight slowdown in cloud backlog growth (to 25% by Q4) and trimming FY26 ex-FX cloud revenue growth to 24% due to deal delays, FX headwinds (incremental 50bps), and Q3 restructuring costs, analysts believe these short-term impacts do not alter SAP's compelling long-term investment thesis.

Analysis

Morgan Stanley has reiterated its 'Overweight' rating and 'Top Pick' designation for SAP SE, reinforcing a bullish long-term outlook despite acknowledging near-term headwinds. The core of their thesis rests on SAP's position as the primary beneficiary of the global ERP upgrade cycle, with the migration to S/4 viewed as a necessity for clients, particularly for integrating AI capabilities. While the bank has trimmed its forecast for FY26 ex-FX cloud revenue growth to 24% from 25% and anticipates current cloud backlog growth to slow from 28% in Q2 to 25% by Q4, it views this 24% growth rate as a floor. Near-term pressures are expected from an incremental 50bps FX headwind and a 'couple hundred' million euro restructuring expense in Q3, which analysts believe is not fully reflected in consensus estimates, potentially leading to 2-3% cuts to FY26 EPS forecasts. However, these factors are weighed against a compelling valuation, with the stock trading at 33 times 2026 adjusted earnings against a projected 17% EPS CAGR for 2026-2028. This is supported by strong operating leverage, with management guiding operating expenses to grow at only 80-90% of revenue, and robust free cash flow that could facilitate share buybacks.

Key Decisions for Investors

• Investors with a long-term horizon may view the current valuation as attractive, as the analysis suggests near-term pressures from deal delays and FX are temporary and do not derail the structural growth driven by the mandatory S/4 ERP upgrade cycle.
• It is prudent to monitor Q3 results for the impact of the guided restructuring charge and FX headwinds, but place greater emphasis on Q4 for any signs of re-acceleration in cloud backlog growth, which could signal that delayed deals are closing.
• Focus on management commentary regarding total revenue growth acceleration and operating leverage, as these are key to validating the thesis of a ~17% EPS CAGR between 2026-2028, which underpins the stock's long-term investment case.