Ten years ago, investors still spoke of SAP in the past tense, an ERP player destined to see Oracle, Microsoft, and Salesforce dominate the cloud era. That narrative was debunked last year when SAP shares soared 70%, overtaking the S&P 500 and even the Nasdaq heavyweights. It was the first clear evidence that the marathon cloud pivot is working. The first quarter of 2025 underscored this: cloud revenue surpassed €5 billion, operating margins rose, and free cash flow exploded to €3.6 billion.
The market still values SAP as a middle-aged software company, even though its growth, margin performance, and dividend policy now resemble those of a high-quality compounder. Now that execution risks are declining and visibility is increasing, I see room for another move higher.
A Cloud Turnaround Years In The Making
SAP’s transition started in pain. License sales shrank, margins compressed, and the share price drifted. Management stuck with the plan, convinced that subscription income would ultimately outweigh the near‑term hits. Today that wager is paying out. Cloud now generates 55 % of revenue and 86 % of the top line is classed as “predictable”. RISE with SAP is winning marquee names—Hyundai, Tyson Foods, Japan Railway—while GROW with SAP opens the door to the mid‑market that Dynamics and NetSuite once roamed freely. Current cloud backlog sits at €18.2 billion, up 28 % year over year, a lead indicator that demand is not peaking.
Europe’s policy push for digital sovereignty strengthens this moat. Brussels wants critical data resident inside the EU and subject to its privacy code. That sends multinational clients straight to Walldorf. Berlin and Brussels are funnelling hundreds of millions of euros into sovereign-cloud projects—SAP’s Delos Cloud venture is already on the shortlist for substantial funding. Crucially, SAP sells neutrality; it implements through Azure, AWS, and Google instead of forcing customers into its own stack. Flexibility is more important than lock-in – something Oracle customers are increasingly complaining about.
AI Built On Real Data
Every vendor now markets an AI copilot, yet most rely on synthetic or consumer data. SAP is different because it owns 50 years of granular, audited transaction records: invoices, payroll runs, global supply‑chain timestamps. That clean data is a goldmine for deterministic models. Joule, launched late 2024, sits natively inside S/4HANA, SuccessFactors and Ariba. Early customer experiences indicate double-digit efficiency improvements in invoice matching and demand forecasting. These aren’t futuristic chatbots, but tangible savings that CFOs can measure.
Even more strategic is SAP Business Data Cloud, a semantic layer that stitches non‑SAP data to core ERP tables. By anchoring third‑party feeds to its schema, SAP guarantees context and lineage, the two traits regulators will insist on as Europe’s AI Act kicks in. Rivals hype foundation models; SAP quietly sells governance and trust. That pragmatism resonates with heavily regulated industries like pharma, defense and utilities. These are areas that Oracle and Salesforce approach with caution.
Competitive Landscape
Oracle’s Fusion ERP is profitable but growing cloud revenue roughly one‑third as fast as SAP. Its single‑vendor stack simplifies procurement yet raises customer‑lock‑in fears. Microsoft’s Dynamics thrives in upper mid‑market deals but rarely lands the kind of multi‑continent mandates SAP signs. Salesforce owns CRM, but a lack of back‑office muscle limits cross‑sell potential. Workday shines in HR and finance, yet concedes manufacturing, logistics and industry verticals to SAP.
What sets SAP apart is scope and depth. A multinational that wants finance, HR, procurement, supply‑chain planning and regulated‑industry compliance on one canonical data model finds only one vendor that checks every box. The market sees that; SAP’s win‑rate in competitive RFPs has climbed steadily since 2022. For the first time in years Oracle sales teams are forced to defend price rather than feature gaps. That role reversal explains why SAP’s cloud backlog is accelerating while Oracle’s moderates.
Financial Review And Outlook – Profits Catch Up With Growth
Revenue climbed 12 % to €9 billion in Q1 2025, but the bigger story was operating leverage. Non‑IFRS operating profit rose 60 % to €2.5 billion; margin widened to 27.2 %. Some of the jump is lap‑over from last year’s restructuring charges, yet even stripping those out the core business posted mid‑teens profit growth. Cloud gross margin reached 75 %, closing the gap with Salesforce and overtaking Oracle’s application margin for the first time.
Cash flow is where SAP now flexes. €3.6 billion of free cash in a single quarter funds the dividend, retires shares and still leaves cash left over. Net debt is a negligible €1.7 billion. Bond maturities are staggered through 2031 with coupons mostly below 2 %. If the Fed holds rates higher for longer, SAP barely notices; 86 % of its debt is fixed. Management guides to €21.6‑€21.9 billion cloud revenue and ~30 % operating‑profit growth for 2025. After Q1 they have already banked nearly half the free‑cash goal, a pace that hints at an upside bias.
Macro risks exist—slowing industrial output in Europe, sticky wage inflation, and energy‑price increases—but SAP’s geographic and sector spread reduces the impact. During last year’s supply‑chain turmoil SAP’s software renewal rate ticked higher because clients needed visibility more than ever. That “mission‑critical” label is hard to displace once earned.
Dividends and Valuation
SAP’s dividend, which was raised to €2.35 a share, yields about 1.0%. The dividend payout ratio sits near 52 % of adjusted earnings and grows in line with profit, creating a compounding cash stream. The €5 billion buyback program is 90 % complete, shrinking the float and giving management an easy lever should the stock pull back.
On valuation, SAP trades near 42x forward 2025 earnings and about 26x forward EBITDA, in line with Oracle, Microsoft and Salesforce. Even without multiple expansion, the math of 15 % top‑line growth, 20‑30 % EPS growth, a safe dividend and ongoing buybacks points to high‑teens total returns.
Risks Worth Watching
Currency fluctuations may affect reported results, although constant currency guidance and a layered hedging program can mitigate volatility. EU regulators may tighten AI compliance rules, yet SAP’s leadership in data governance should turn that burden into a moat. Competition remains fierce; Microsoft’s Copilot is gaining market share and Oracle is discounting Fusion to slow defections. The biggest internal risk is execution—keeping cloud migrations on schedule and protecting gross margin as scale grows. So far, the track record is encouraging.
Investment Conclusion – Strong Buy
SAP’s narrative has shifted from defensive turnaround to offensive growth story. Cloud adoption is peaking, AI is being transformed into tangible workflows, and profitability is increasing quarterly. The market ignores the higher quality of today’s revenue and the structural leverage now embedded in the model.
I believe that gap closes over the next 12‑18 months. With backlog swelling, debt trivial, and cash returns accelerating, SAP offers growth, income and durability. For institutional allocators needing reliable tech exposure outside the U.S., and for retail investors hunting for compounders they can hold through cycles, SAP earns a Strong Buy rating. The next era of European enterprise software leadership is unfolding, and SAP sits squarely at its centre.