Key insights
- The author presents a bullish case for SAP, highlighting its entrenched position in the ERP market and the high switching costs for its customers. While acknowledging risks like competition and the transition to cloud-based services, the author believes SAP's stickiness and the current economic climate will favor its continued dominance. This could positively influence US equities by signaling continued investment in established software solutions.
The most common companies getting thrown around here are NOW, CRM, ADBE, CRWD with the first three being close to their 52week lows.
Although I’ve seen this thrown around it’s not often and it’s SAP.
SAP - at its core is an ERP system that’s used by every major company. It’s not super flashy upstream product, it’s the opposite it’s the first record of truth. A customer orders something, a manufacturer produces something, an insurance company gets a claim filed, HR….,Finance. Every mid to large cap company uses AND needs this. SAP captures it all and then the data is processed and synthesized for upstream analytics. You might have used concur at work when you travelled.
This is one of the most stickiest product out there: not just because of the necessity but the level of customizations companies can do AND have done on SAP. It’s very difficult to move to a different ERP and much less build your own. Companies have tried and failed and lost billions and came to SAP.
The Fears
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There will be new ERP competitors - maybe or maybe not but companies will not take the chance or risk with a new vendor. The risk is not worth the return. They might switch to an existing proven vendor like D365 or Oracle.
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Support for existing SAP ends soon and customers have to go to cloud so it’s an opportunity for them to leave SAP and go with a another vendor or delay the migration
- This is very valid. I’ve seen companies leave their ERP for another vendor because how much they hated it. The problem with this - the amount of time and effort. In this economy I don’t think companies would want to spend capital to make this change. I believe companies will just stick to SAP cloud and this is a tailwind.
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Agentic AI and Licensing - why need licenses for every employee when have an agent get a license? The move to the cloud will move away from traditional licensing model and towards reoccurring.
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SAP isn’t very innovative and they are slow with wait and see approach. Yes this has been the case in the past and I’m 50/50 on it. I want them to be more aggressive but at the same time I can see why they move with cautious. They have a strong MOAT so why spend unnecessary cash but rather follow Apples approach.
I don’t want to get into the fundamentals here but for me the price offers a good risk/return. I’ll get into financials and fundamentals at a later post if people care.
Thoughts?