On Wednesday, HSBC (LON:HSBA) updated its financial outlook on SAP SE (ETR:SAPG) (SAP:GR) (NYSE: SAP), increasing the price target to €200 from €180, while reaffirming a Buy rating on the stock. The revision reflects a positive view of the company's first-quarter performance for 2024, which, according to the firm, has shown strong business momentum and successful implementation of a transformation program geared towards capitalizing on artificial intelligence opportunities.
SAP's financial results for the first quarter of 2024 have been seen as a solid step towards achieving the company's full-year and mid-term goals. This comes despite a challenging macroeconomic environment. The company's efforts to decouple expenses from revenue growth suggest a potential for high free cash flow (FCF) and strong operating leverage.
The upgrade comes after SAP's shares have seen a significant increase of 24% year-to-date, outperforming the DAX's 8% rise during the same period. HSBC believes that SAP's cloud business is expected to gain momentum from 2024 onwards, serving as a key driver for the stock's continued performance.
Furthermore, the appointment of Dominik Asam as Chief Financial Officer is anticipated to bring a sharper focus on cost management and FCF generation, which could contribute to a revaluation of SAP's stock.
Despite the recent price surge, HSBC views SAP's stock as still attractive, trading at an estimated price-to-earnings ratio for 2025 of 23 times, which is within the company's five-year historical forward range of 20 to 24 times.
HSBC's revised stock price target is also influenced by a reduction in the weighted average cost of capital (WACC), which has been lowered to 8.0% from 8.5%. This adjustment reflects a decrease in the specific risk premium used in the firm's discounted cash flow (DCF) model, due to SAP's consistent performance and predictability in revenue generation.
InvestingPro Insights
In light of HSBC's optimistic outlook on SAP SE, current real-time data from InvestingPro shows that the company holds a market capitalization of $218.81 billion, with a notable P/E ratio of 42.52. This valuation metric is particularly relevant as it aligns with HSBC's mention of SAP's trading at an estimated P/E ratio for 2025.
Moreover, SAP's revenue growth over the last twelve months has been positive at 5.36%, which supports the view of strong business momentum cited in the first-quarter performance for 2024.
InvestingPro Tips highlight that SAP has maintained dividend payments for 33 consecutive years, which may interest investors looking for consistent returns. Moreover, SAP is recognized as a prominent player in the Software industry, which could be a contributing factor to the company's robust market performance and the 24% increase in share price year-to-date.
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These insights and tips serve to provide a broader perspective on SAP's financial health and market position, complementing the analysis provided by HSBC and offering additional context for investors considering SAP's stock.
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