SAP (XTRA:SAP) could be undervalued by 36% due to AI and cloud push

SAP (XTRA:SAP) is ramping up its AI and cloud efforts, with a new assistant, expanded partnerships and Consulting AI Factory efforts gaining traction, even as short-term profits remain a focus due to a lower earnings outlook.

Check out our latest analysis for SAP.

SAP’s recent AI and cloud announcements come amid a sharp rebound in its stock price, with a 7-day stock return of 16.19% and a 30-day stock return of 17.29%. However, the year-to-date stock return has declined by 21.52%, and the 1-year total shareholder return has declined by 35.12%, while the 3-year and 5-year total shareholder returns are 32.77% and 41.20%, suggesting that long-term holders are still reaping the benefits.

If you’re keeping an eye on SAP’s AI push, you might want to expand your watchlist to include other potential beneficiaries and check out these 56 AI infrastructure stocks.

SAP looks like a strong company on paper, with its cloud and AI services growing and a sizable share buyback already completed. After the recent rally and last year’s decline, is the stock still on sale, or is it already fairly priced?

Most popular story: 36% underrated

Compared to SAP’s last closing price of EUR 158.50, the fair value of the most favored story is set at EUR 246.79, suggesting a significant valuation gap based on this framework.

The disconnect is not between performance and strategy. It’s between market expectations and how long it actually takes for a major transformation.

One company, two time horizons. This is unpleasant for traders. Crucial for long-term investors.

Read the whole story.

It will be interesting to see what’s behind that fair value for SAP. This story relies heavily on revenue growth, higher profit margins, and higher future earnings multiples. I’d like to know the big picture behind those assumptions.

Result: fair value €246.79 (undervalued)

Read the full explanation to understand what’s behind the predictions.

But the story could quickly change for SAP if the timing of its cloud deal expansion disappoints again, or if margin growth stagnates while the company continues to invest heavily in AI.

Learn about the key risks to this SAP discussion.

Another look at SAP using market multiples

The first story is based on SAP’s fair value of €246.79, but current market data is less generous. SAP clearly trades at a premium, with a P/E of 23.5x, compared to 21.9x for the European Software industry and 20.9x for its peers. A fair ratio of 29.8x indicates there is room for the multiple to rise further, but it also means investors have already paid for it. How comfortable are you with the trade-off between potential upside and valuation risk?

To take a closer look at how this P/E premium fits into the broader picture, including how the market fair ratio trends over time, check out what the numbers say about this price. See the breakdown of ratings.

next step

There is clearly a mix of optimism and caution regarding SAP. So now is a good time to look at the numbers for yourself and act quickly. Let’s take a closer look at four key perks to see what investors are currently optimistic about.

Looking for ideas for investing in SAP?

If SAP is increasing its focus on quality, don’t stop here. Use the Simply Wall Street screener to find other stocks that deserve to be on your radar.

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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