UBS upbeat on SAP as AI drives cross-selling and cloud growth momentum

UBS Global Research maintains a positive outlook on SAP, citing AI as a key driver for cross-selling within its enterprise application suite. SAP's AI-focused strategy is expanding its wallet share among existing clients, with those using four or more SAP solutions contributing 74% of cloud revenue. UBS raised its 12-month price target to €307 from €265, reflecting increased confidence in SAP’s long-term growth and margin outlook, although they revised the 2026 free cash flow estimate slightly downward due to currency effects and customer transformation incentives.

Analysis

UBS Global Research maintains a positive outlook on SAP SE (SAPG), driven by the company's artificial intelligence strategy which is enhancing cross-selling across its enterprise application suite. SAP's focus on AI, showcased at its SAPPHIRE event, is demonstrably expanding its wallet share among existing clients; notably, the 23% of SAP’s cloud customers utilizing four or more SAP solutions now contribute 74% of cloud revenue, an increase from 65% a year ago, signaling successful integration and monetization. The company aims to significantly scale its AI use cases from 230 to over 400 by year-end, embedding AI across its Business Data Cloud and software portfolio, facilitated by standardized data models. This cross-sell and upsell momentum has been a significant growth driver, contributing nearly €4 billion of the €10 billion increase in SAP’s cloud revenue over the past four years, with new customers since 2020 adding approximately €2 billion in annualized revenue and growing at 20% annually. While only about €1 billion of SAP’s maintenance revenues have migrated to the cloud, this indicates substantial untapped potential. Transformation credits are a current headwind but are expected to become a tailwind upon amortization. Despite a downward revision of the 2026 free cash flow estimate to €8.8 billion from €9.4 billion, attributed to currency effects and customer drawdown of transformation incentives, UBS raised its 12-month price target for SAPG to €307 from €265. This reflects heightened confidence in long-term growth and an improved margin outlook, justifying an increased valuation multiple for SAP’s cloud business from 7.5x to 10x 2027E EV/Sales. However, UBS expresses some caution regarding SAP's ability to meet the upper end of its 26–28% 2025 cloud revenue growth target, and an external AI analysis by InvestingPro suggests SAPG may not be among the top-ranked undervalued stocks.

Key Decisions for Investors

• Investors should consider the strong cross-selling momentum driven by SAP's AI initiatives and the significant revenue contribution from multi-solution cloud customers, which supports UBS's increased price target and positive long-term outlook.
• Monitor SAP's execution on expanding AI use cases to over 400 by year-end and the progress in migrating its substantial maintenance revenue base to the cloud, as these are key potential growth drivers.
• Factor in the revised, lower 2026 free cash flow estimate due to currency and incentives, and the slight caution on achieving the upper range of 2025 cloud revenue growth, alongside the InvestingPro assessment, when evaluating the risk/reward profile and current valuation.