SAP (XTRA:SAP) stock could be 50% undervalued as AI rework deepens

SAP stock has fallen 44.5% over the past year, but both its discounted cash flow (DCF) intrinsic value estimate and market multiple indicate the stock is currently trading at a discount to its valuation.

• Over the past 12 months, SAP has fallen 44.5%. This means that a lot of the pessimism is already reflected in the stock price.
• Recent moves to accelerate AI product development and deepen cloud partnerships may support long-term cash flow expectations. At the same time, execution risks related to transitioning to AI or changing pricing models may weigh on investors’ willingness to pay.
• The stock is undervalued based on both discounted cash flow (DCF) estimates and earnings multiples, which suggest an upside of approximately 49.9% to intrinsic value. However, as shown in the assessment summary, the broader checks were mixed, with SAP passing only three of the six assessment tests.

The question now is whether SAP’s apparent discount is enough to offset the execution and cash flow risks implied by the recent shift to consumption pricing for AI-driven products and cloud ERP.

SAP’s return over the last year was -44.5%. See how this compares to other software industries.

Is SAP still cheap in terms of cash flow?

Discounted cash flow (DCF) models value SAP by predicting future free cash flows and discounting them to the present. For SAP, trailing twelve month free cash flows were approximately €8.1 billion, and the model assumes that these cash flows will continue to grow over time from this base. On this basis, a two-step free cash flow-to-equity approach suggests an estimated intrinsic value of approximately €278.51 per share.

This means that SAP is trading at around a 49.9% discount to its intrinsic value when compared to its current share price. This method determines that the stock is undervalued. Recent executive changes to accelerate SAP’s AI strategy and introduce AI-linked cloud ERP pricing help explain why the market is focused on execution risk, even though the cash flow outlook in the model remains supportive.

Overall, DCF scrutiny suggests that SAP stock currently appears to be undervalued relative to the cash flows analysts expect it to generate.

Our discounted cash flow (DCF) analysis shows that SAP is undervalued by 49.9%. Track this with your watchlist or portfolio, or discover 210 more high-quality undervalued stocks.

For more information on how we calculate this fair value for SAP, please see the Valuation section of our Company Report.

Does SAP seem undervalued in terms of revenue?

The P/E ratio is a useful cross-check for SAP, as it reports positive earnings and is part of a mature, profitable software peer group. SAP currently trades at a P/E ratio of approximately 22.3x, which is very close to the overall software industry average of 22.4x and slightly above the 18.2x average for some of its peer groups.

However, a valuation model that takes into account SAP’s size, margins, sector, and risk profile suggests a higher P/E ratio of approximately 31.2x. This results in SAP trading at a discount to this customized benchmark, suggesting that the market is assigning it a lower multiple than the model suggests, even as the company advances AI-centric products and partnerships across its ecosystem.

Taken together, these checks indicate that SAP stock appears to be undervalued at its current P/E ratio compared to what its fundamentals suggest is a fair ratio.

See what the numbers say about this price. Please check the rating breakdown.

The SAP story: What justifies today’s prices?

The Simply Wall Street Narrative for SAP takes a starting point in this valuation puzzle by detailing what path for SAP’s growth, margins, and earnings is necessary for the stock to be worth materially more or less than today’s price. These are available from the company’s community page. Each story ties the fair value estimate to a specific set of SAP’s potential catalysts and risks, so you can see which version of events materializes over time.

One of the community’s top narratives about SAP: 44% is undervalued

“The disconnect is not between performance and strategy, but between market expectations and the actual time it takes to make a major change.”

Read top stories on SAP

Think there’s more to the SAP story? Visit our community to see what others are saying.

conclusion

While SAP appears to be undervalued on both its discounted cash flow (DCF) intrinsic value estimates and current earnings multiples, the broader check in the mix highlights that this is not a simple mispricing story. The key question is whether SAP can turn its AI and cloud ERP push into sustainable cash flow without hurting profitability or spooking customers with pricing or product changes. So far, this discount appears to reflect not only opportunity but also true execution risk. The most important question from this is whether SAP can prove that an AI-focused transition can deliver the cash flow profile implied by the intrinsic value scrutiny.

This article by Simply Wall St is general in nature. We provide commentary using only unbiased methodologies, based on historical data and analyst forecasts, and articles are not intended to be financial advice. This is not a recommendation to buy or sell any stock, and does not take into account your objectives or financial situation. We aim to provide long-term, focused analysis based on fundamental data. Note that our analysis may not factor in the latest announcements or qualitative material from price-sensitive companies. Simply Wall St has no position in any stocks mentioned.

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