Will SAP's Huge IoT Initiatives Trump Client-Spending Woes?

On Oct 3, 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.

SAP posted significant top-line growth in its 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 the revenue performance.

The company also recorded strong new cloud bookings, which is a key indicator of sales success in cloud.

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 aid users in dealing with live data and seek information on any aspect of their business.

SAP AG ADR Price and Consensus

SAP AG ADR Price and Consensus | SAP AG ADR Quote

Earlier this year, SAP started 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 using IoT-based systems. In fact, just last week, the company announced that it has earmarked a whopping $2.2 billion for the expansion of its Internet of Things portfolio.

SAP is also acquiring Italian IoT firm Plat.One — which develops a platform used for creating, deploying, and managing IoT applications — as part of its IoT initiative. SAP’s recent acquisition of Norwegian analytics software maker – Fedem Technology – which specializes in engineering analysis software will empower SAP to develop IoT’s analytics section.

Further, the company declared that it will launch a new product line — SAP IoT — which will integrate huge amounts of data from things connected to the Internet, with machine learning and SAP's real-time database S/4 HANA. SAP also plans to open SAP IoT Labs globally, in order to foster engagement with local IoT startups and partners.

Thus, this huge investment is part of a major push into the budding IoT space which will aid SAP in staying ahead of the curve.In addition to research and collaboration, the company has also reserved part of its $2.2-billion fund for targeted acquisitions, like small bolt-on deals that are a good fit with SAP's IoT portfolio.

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

However, despite the robust cloud business, intensifying competition from technology heavyweights, including Microsoft Corporation (NASDAQ:MSFT) 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 headwinds 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.

Stocks to Consider

A better-ranked stock in the same space is Adobe Systems Incorporated (NASDAQ:ADBE) , carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Adobe Systems is a leading player in the computer software space. The company has a striking earnings surprise history over the trailing four quarters, having beaten estimates all through, for an average beat of 5.6%.

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