Will SAP's HANA, Cloud Offerings Offset Low Client Spending?

On Aug 29, we issued an updated research report on Walldorf, Germany-based SAP SE (DE:SAPG) (NYSE:SAP) , which provides application and analytics software and software-related services for enterprises, globally. The company currently carries a Zacks Rank #3 (Hold).

SAP is one of the leading companies worldwide that makes enterprise software for business operations as well as customer relations. The company has established a robust position in three of the most critical client demand areas, namely – customer engagement, human capital management and interconnected commerce network – which in turn, is proving conducive to growth.

Last month, SAP displayed significant top-line growth when it reported second-quarter 2016 results, driven by business transformation initiatives. A flourishing cloud business along with strong growth of support revenues boosted the top line, while weak Software licenses & support revenues partially weighed on revenue performance.

The company also recorded strong new cloud bookings – a key indicator of sales success in cloud business – which surged 28% year over year in the quarter under review.

Meanwhile, its proprietary offering SAP S/4 HANA continues to be a fundamental catalyst for its core business. Recently, the company announced upgrades to the system like – Cloud Identity Access Governance, smart data quality, smart data integration, and other Data Services – which will facilitate integration of all businesses and their data into a single source. This will help users deal with live data and find information on any aspect of their business.

Earlier this year, SAP starting focusing more of its resources on its Internet of Things (IoT) segment. It is developing a range of products that will be able to support clients already using IoT-based systems. SAP is also working on a future generation of SAP IoT implementations. We believe that SAP’s efforts will capitalize on the burgeoning IoT market, thus aiding its growth prospects.

We expect the company to continue to fare well as business enterprises keep reinventing in business models and making transition toward digital businesses processes.

However, despite the cloud business strength, intensifying competition from technology heavyweights including Microsoft Corporation (NASDAQ:MSFT) , International Business Machines Corporation (NYSE:IBM) and Amazon.com, Inc. (NASDAQ:AMZN) may pose challenges for the company. Also, volatile client spending in the technology sector, sluggish global economy and currency fluctuations may act as a headwind for SAP in the upcoming quarters.

Furthermore, prolonged weakness in some of the company’s key end markets in Latin America may pose concerns for the company, upsetting its growth momentum.