SAP SE: BMO raises price target, sees growth through cloud strategy

Investing.com - BMO Capital Markets has upgraded SAP SE (ETR:SAPG) to "Outperform" and raised the price target from $218 to $237. The analysts cited the promising outlook for SAP's ability to transition its large customer base to cloud solutions, which is expected to lead to significant revenue growth in the coming years. Based on the current price level, the new price target implies a return potential of over 18%.

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Keith Bachman, internet analyst at BMO, emphasized that despite a challenging macroeconomic environment, SAP's efforts to transition its customers to the S/4HANA Cloud continue unabated. "We believe that SAP is continuously improving its portfolio, which helps migrate existing customers to the cloud," Bachman explained. He also highlighted the urgency created by the upcoming end-of-support dates in 2027 and 2030, which is pushing customers to proceed with transitions despite economic uncertainties.

The analyst detailed SAP's strategy to leverage its extensive maintenance stream and transition to the S/4HANA Cloud. Bachman forecasts that if SAP's consolidated revenues grow by 9% annually in fiscal years 2026 and 2027 and by 7% until 2030, this could lead to new revenues of €23.7 billion compared to 2023. A significant portion of this growth is expected from the transition of 60% of the 2023 maintenance base to a 2.5x revenue growth, accounting for about 45% of the projected new revenues by 2030.

The analyst also noted some successes in acquiring new customers, particularly in the small and medium-sized enterprise (SME) segment through SAP's GROW and RISE programs. Although the revenue contribution from these new customers is expected to be modest, it is seen as beneficial for SAP's overall valuation.

Bachman expressed confidence in the sustainable growth of SAP's cloud offerings. "We believe that SAP can maintain mid-to-high double-digit growth in the current cloud order book and low 30% growth in the cloud ERP order book," he said. Additionally, BMO remains optimistic that SAP will achieve the consensus target of €8 billion in free cash flow (FCF) by fiscal year 2025.

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