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Following tech giants such as Amazon (AMZN) and Nvidia (NVDA), enterprise software major SAP (SAP) has also joined the voices making a case for quantum computing. Sounding bullish about the technology, SAP CEO Christian Klein recently stated “There is a door which is opening with quantum computing. We see this absolutely.” Klein further went on to say that "But time-wise, we can definitely believe that simulations you would run today in a week, you can probably bring down to an hour. Give this technology a few more years, probably we will talk hours or minutes at a certain point of time.”
Klein’s assertions are also finding traction in the market with the Defiance Quantum ETF (QTUM) surpassing the $1 billion in assets under management while quantum computing upstarts such as Quantum Computing (QUBT) and Rigetti Computing (RGTI) witness searing rallies of more than a 1,000% over the past year.
So, can an established player like SAP be a serious contender in the soon-to-be-exploding quantum computing market? Let’s find out.
About SAP Stock
Founded in 1972, SAP (SAP) is a global leader in enterprise application software. Its core products and services include enterprise resource planning (ERP), cloud computing, customer experience, supply chain procurement, human experience management and business network and analytics. The company currently commands a market capitalization of $338 billion.
Over the past year, SAP stock has been an outperformer with a rise of 57.7%. It also offers a modest dividend yield of 0.9%.
Solid Financials
The results for the most recent quarter, reported on Oct. 21, saw SAP posting growth on both the revenue and earnings front. Revenues for the quarter came in at 8.5 billion euros, up 9% from the previous year. Core cloud revenues of 4.5 billion euros (+25% YOY) propelled the overall revenue figure higher aiding in the rise of EPS to 1.25 euros per share, up from 1.09 euros in the year-ago period.
The total backlog for the cloud business increased by 25% from the prior year to 15.4 billion euros as gross margins of the business improved to 73.2% from 72.7% in the prior year.
Cash flow activities remained robust with net cash from operating activities coming in at 1.5 billion euros and free cash flow at 1.2 billion euros, up from 1.1 billion euros and 865 million euros in the previous year, respectively. Overall, the company closed the quarter with a cash balance of 10 billion euros which was above its short-term debt levels of 5.8 billion euros.
Further, SAP increased its revenue guidance for 2024 to 29.5 billion to 29.8 billion euros, up from 29.0 billion to 29.5 billion euros while operating profit and free cash flow ranges were also revised upwards to 7.8 billion to 8.0 billion euros and 3.5 billion euros to 4.0 billion euros.
Performance Drivers
SAP’s AI initiatives are making significant strides, as nearly a third of deals signed in the quarter were tied to AI solutions. This growing demand underscores the increasing need for embedded AI capabilities, which, in turn, serves as a catalyst for SAP’s cloud migration strategy. By leveraging AI, SAP is accelerating the transition of clients to its cloud suite, as full utilization of AI features necessitates the adoption of cloud offerings.
SAP has also entered the “expand” phase of its “land-and-expand” strategy, transitioning from embedded AI solutions to broader generative AI offerings. A standout example of SAP’s advancements in AI is Joule, its collaborative copilot. Joule’s ability to orchestrate multiple AI agents in executing complex, end-to-end processes highlights a new level of productivity, akin to an AI manager coordinating a team of agents. Adding to this is SAP’s Knowledge Graph, a core component of its GenAI toolkit. This innovation bridges language and data, enabling GenAI to gain a profound understanding of SAP systems, thereby significantly reducing the learning curve for clients to fully leverage these solutions.
The company’s cloud revenue growth is fueled by strong demand for S/4 HANA migrations and increasing adoption of AI-powered features. This momentum is a testament to SAP’s successful integration of AI into its offerings, making its cloud solutions indispensable for businesses looking to optimize operations and decision-making.
At the heart of SAP’s success is its enterprise ERP system. These systems, often taking years to implement, manage critical business functions, including customer data, inventory, and transactions. Once embedded, ERP systems become the backbone of a company’s operations, with businesses typically relying on them indefinitely. SAP is now enhancing this foundation by incorporating AI into its supply chain solutions, enabling faster decision-making, streamlined product development, and optimized manufacturing processes. The company’s expanded partnership with Amazon Web Services (AWS) further underscores its focus on bringing AI-powered ERP solutions to a broader audience.
In the realm of quantum computing, SAP has been more discreet regarding its partnerships but has demonstrated a clear commitment to advancing the technology. As a member of the European Quantum Industry Consortium (QuIC), SAP is actively involved in fostering the development of quantum technologies. Laure Le Bars, a research project director at SAP and the president of QuIC, has emphasized the collaborative efforts of the consortium, which includes industry leaders, policymakers, and academic institutions. SAP envisions a future where hybrid architectures, blending classical and quantum computing, will achieve unprecedented business outcomes.
SAP is also actively participating in the Quantum Technology and Application Consortium (QUTAC), a German-based initiative aimed at applying quantum technology across industries. With its leadership in these consortia and its ongoing innovations in AI and cloud solutions, SAP is positioning itself as a pioneer in leveraging cutting-edge technologies to drive business transformation.
Analyst Opinions on SAP Stock
Overall, analysts have attributed a rating of “Strong Buy” for the stock with a mean target price that has already been surpassed. Its high target price of $305 denotes upside potential of about 11% from current levels. Out of 20 analysts covering the stock, 17 have a “Strong Buy” rating, one has a “Moderate Buy,” rating and two have a “Hold” rating.
