Citizens Downgrades SAP SE (SAP) After CRB Growth Slows to Nine-Quarter Low

SAP SE (NYSE:SAP), a leading provider of enterprise resource planning (ERP) software enhanced by artificial intelligence, recently faced a downgrade from Citizens analyst Patrick Walravens on January 30. The stock was moved from Market Outperform to Market Perform following a slowdown in current cloud backlog (CRB) growth to its lowest rate in nine quarters. Macroeconomic uncertainties also contributed to the firm’s revised outlook.

Disappointing Fourth-Quarter Results

The downgrade followed SAP’s fourth-quarter earnings report, which revealed “disappointing top-line results” despite exceeding expectations in some areas. Non-IFRS earnings per share reached €1.62, surpassing the consensus estimate of €1.51, and operating profit totaled €2.83 billion, above the anticipated €2.75 billion.

However, total revenue came in at €9.68 billion, falling short of the expected €9.75 billion. Cloud revenue also missed projections, reaching €5.61 billion compared to an anticipated €5.64 billion.

Did You Know? SAP is recognised as one of the 10 AI stocks making waves on Wall Street.

CRB Growth Slowdown

The key concern highlighted by Citizens was the deceleration of CRB growth, which slowed to 25% in constant currency. This represents the lowest growth rate in nine quarters and missed analyst expectations.

SAP attributed the slowdown to a shift in deal mix towards “larger transformations,” which often involve extended implementation periods or flexible structuring. “mounting geopolitical tensions” are prompting customers to explore “Sovereign SaaS options.”

Expert Insight: A slowdown in CRB growth can signal potential challenges in future revenue recognition, as it represents the value of contracts yet to be fulfilled. This is particularly significant for cloud-based businesses where recurring revenue is a key metric.

Market Reaction

The news has impacted SAP’s stock performance, with a decline of approximately 15% on Thursday and an 18% decrease year-to-date. This contrasts with increases of around 2% for both the Russell 3000 and the S&P 500 indices.

Frequently Asked Questions

What is SAP’s primary business?

SAP SE is a leader in ERP software, leveraging artificial intelligence to enhance its enterprise resource planning solutions.

Why did Citizens downgrade SAP’s stock?

Citizens downgraded the stock due to a slowdown in current cloud backlog (CRB) growth to its lowest rate in nine quarters, coupled with macroeconomic uncertainties.

Did SAP meet all of its earnings expectations?

SAP exceeded expectations for non-IFRS earnings per share and operating profit, but fell short of revenue and cloud revenue consensus estimates.

How might SAP respond to the challenges of slower CRB growth and geopolitical tensions in the coming quarters?