SAPping Strength

Baby Groot to small to ride spaceship

Image source: Telecine @telecine - Giphy; Noel V. Baebler, Boonchuay1970, ktsdesign - Shutterstock

What's going on?

Germany’s SAP – Europe’s biggest tech company – reported revenue and profit that beat investors’ expectations on Tuesday. But it also announced that growth at its crucial cloud computing business was slowing, and investors looking for something bigger turned SAP away – sending its shares down 3%.

What does this mean?

SAP, which sells business operations software, reported fourth-quarter profit 12% greater than a year before as well as improving margins – largely thanks to the cloud component SAP’s spent $26 billion bolting competitors onto over the past decade.

All that nubilous voracity has led to growth; just not enough growth to sate investors’ appetites. SAP’s new cloud revenue was 19% higher last quarter than a year ago – but a single big new client accounted for over half of that. Excluding this shows cloud growth actually slowing down…

Why should I care?

For markets: Jack of all trades.

While cloud now accounts for most of SAP’s overall growth, the company started off in accounting software. And the continued legacy of this business may be part of SAP’s problem: it’s competing against cloud-first firms like Salesforce which can innovate faster. Investors, significantly, tend to prefer “pure-play” firms: the value of a company trying to do too much isn’t always greater than the sum of its parts. Fellow European tech conglomerate Philips seems to be capitalizing on that: it announced on Tuesday that it would continue a wave of recent divestments with the sale of its domestic appliances unit.

Zooming out: Who runs the world?

SAP’s cloud software runs on cloud hardware – a market particularly prominent this week. Microsoft, Amazon, and Alphabet are all duking it out for dominance in the server space, and all of them shortly report earnings. As with SAP, investors will be looking for growth in their cloud segments – particularly from Alphabet, which is reportedly considering pulling the plug if it doesn’t overtake Microsoft’s offering by 2023.

Originally posted as part of the Finimize daily email.

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