4 Reasons to Add SAP Stock to Your Portfolio Right Now

SAP SE SAP is one technology company that continues to display strength in several areas. Adding the stock to your portfolio should not be a disappointment. Shares of the enterprise-application software provider have gained 7.2% over the past year, outperforming the 5.9% growth of its industry.

Earnings estimates for SAP have exhibited an uptrend, reflecting optimism in the stock’s prospects. The Zacks Consensus Estimate for the company’s current-year earnings has also moved up 2 cents over the past 60 days. Let us delve deeper into the other factors that make this Zacks Rank #2 (Buy) stock a lucrative pick. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

What Makes the Stock an Attractive Pick?

Q1 Results, Upbeat Guidance

SAP reported first-quarter 2018 IFRS earnings per share of €0.59 (71 cents), reflecting a surge of 37% on a year-over-year basis. The year-over-year improvement can primarily be attributed to a notable increase in operating profit.

Total revenues, on IFRS basis, for the quarter were €5.26 billion ($6.42 billion), almost flat year over year. A flourishing cloud business, along with robust improvement of support revenues, aided top-line growth during the quarter.

New cloud bookings — a key indicator of sales success in cloud business — were up an impressive 25% (at constant currency) to €245 million in the reported quarter. The company's customer experience solutions witnessed triple digit year-over-year growth in new cloud bookings. During the quarter, Jaguar Land Rover, Coca-Cola, and Unilever were added to SAP's customer experience solutions client base.

On the back of the completion of the acquisition of Callidus Software and stellar operating profits recorded in the first quarter, SAP raised guidance for 2018. The company anticipates non-IFRS total revenues to come in the range of €24.8-€25.3 billion at constant currency (cc), up from the previous range of range of €24.6-€25.1 billion. This represents growth of 5.5-7.5% year over year. The contribution of Callidus Software is expected to be around €200 million.

Additionally, non-IFRS operating profit for 2018 is estimated to be in the band of €7.35-€7.5 billion, up from €7.3-€7.5 billion, reflecting year-over-year growth of 8.5-11%. Callidus is expected to provide €10 million.

Strong Growth Prospects

The company’s Zacks Consensus Estimate for fiscal 2018 earnings of $5.19 reflects year-over-year growth of 3.4%. Moreover, earnings are expected to register 10.8% improvement in fiscal 2019. The stock has a long-term expected earnings per share growth rate of 7.21%.

Valuation Looks Rational

The company currently has a trailing 12-month Price/Earnings (P/E) ratio of 22.08. This is quite low compared with the current P/E for the industry that is pegged at 475.00. Its lower-than-market positioning indicates that there is room for an upside in the quarters ahead.

Growth Drivers

SAP’s Cloud and Software businesses have been consistent growth drivers for quite some time. Impressive growth in S/4HANA and other Cloud initiatives has supported the company’s top line.

Its human capital management applications have also added to revenues driven by accelerated adoption of SuccessFactors Employee Central. These are expected to continue being beneficial to the company.

SAP concluded the acquisition of Callidus Software Inc. for $2.4 billion, on Apr 5, 2018. The company had entered into a definitive agreement to acquire Callidus on Jan 30, 2017.

The terms of the deal represent a purchase price of $36 per share. The buyout not only gives SAP access to new sales analytic and customer engagement tools but also bolster its foothold in $46 billion cloud-based customer relationship management (“CRM”) market.

SAP anticipates the deal to be neutral to its non-IFRS earnings for 2018 and accretive to 2019 non-IFRS earnings.

The company plans to consolidate its vibrant SAP Hybris cloud portfolio, part of its Cloud Business Group with CallidusCloud product assets.

With the buyout of Callidus, SAP will boost its strength in front-office and back-office software, consequently increasing operational efficiencies.

Other Stocks to Consider

Amazon.com, Inc. AMZN, NVIDIA Corporation NVDA and Citrix Systems, Inc. CTXS are other stocks worth considering in the broader technology sector. All the three stocks sport a Zacks Rank #1.

Long-term earnings growth rate for Amazon, NVIDIA and Citrix Systems is currently pegged at 30.2%, 10.3% and 9.1%, respectively.

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