Key culprits: lower licence sales (down 30% YoY LFL) and service revenues down 5-6% against the consensus.
If you look at Q3 revenues, excluding Business Objects, they are probably down 7% versus Q3 2007.
Given the size of the recession, one could say it is not a big deal.
The problem for SAP is two-fold:
- Lower licence sales indicate lower future service revenues. Service revenues are where SAP makes its margin. Future cash flows expectations will have to come down. The SAP DCF value will go down. Probably by more than today’s decline.
- The lower revenues indicate that demand has stabilised at a lower level. IT spending is meant to be an efficient way of saving money. Buy IT in deflation one says.
SAP, Microsoft are fascinating examples on how a company transition from a growth phase to a mature phase. SAP’s sales, net income and share price have gone up 8x, 15x, 4.5x respectively in the last 15 years.
Therefore, its P/E has and continues to compress. Maybe the stock will end up on 10x.
Investors are less and less incline to pay for the stream of earnings of SAP.
One solution for them would be to increase their payoff ratio to 100%.
Or continue using the cash flows to buy businesses to improve the growth profile.
Stock view: unless the market swings back towards deflation, the stock is likely to underperform.
If the market takes fright again, then its low capital intensity will play out.
As an absolute return play, I struggle to see much upside in the next 6 months.
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