SAP has announced it will go all-in on cloud computing, provoking an extreme reaction from the market.
According to a Reuters report (opens in new tab), SAP CEO Christian Klein said shifting into cloud and providing value to customers is more important than medium-term profitability.
“We are at an inflection point,” he said. “I am not willing to trade value to our customers for short-term margin optimization.”
The company expects up to $26 billion in revenue from its cloud services by 2025, outperforming traditional license sales, which have been a staple of the business for decades. Total adjusted revenue for 2025 is expected to sit at $42.5bn, with adjusted operating profit of $13.5bn - making for a 31.9 percent margin.
Investors reacted to the news by dumping SAP stocks in an unprecedented manner, causing prices to plummet 20 percent and eliminating $35bn in value.
JP Morgan's price target for SAP is now roughly $140, down from $190, and the stocks have been downgraded from “overweight” to “neutral”. Citibank is also reported to have said that SAP’s “cautious outlook” may hurt broader sentiment towards European tech and software stocks.
One of the reasons for skepticism among investors could a lack of confidence in SAP’s ability to play in the same field as the cloud giants. The company also claimed that Covid recovery may take longer than expected, which could also have had an impact.