SAP share surge shows’ cloud strategies are alive and well in AI boom

The German software giant has reported stable growth over its past three quarters, while its cloud software peers, including Salesforce and Workday, have been under pressure to prove they can win over customers tempted to spend their information-technology dollars on new, flashier AI products .

SAP’s earnings, along with those of technology company International Business Machines, which posted second-quarter results ahead of Wall Street expectations, have been a bright spot as Wednesday’s stock-market selloff wiped out hundreds of billions of dollars in value from the tech stocks of the Magnificent Seven—Alphabet, Amazon, Apple, Meta Platforms, Microsoft, Nvidia and Tesla.

Best known for its enterprise resource planning systems, which are a collection of interconnected apps that help companies manage data across business units such as accounting and human resources, SAP has spent recent years moving its business from data center-based license sales to subscription-based cloud services.

ERP systems have been essential to business functions for decades, unlike sexier AI chatbots and services such as ChatGPT. But the investors who’ve bet on boring, back-office technology—albeit also with an AI bent—are the big winners this week.

That’s also a key difference between SAP and companies like Salesforce, said Fred Boulan, head of European software, IT services and payments at Bank of America. SAP has only moved about one-third of its customers to the cloud, so there’s more business left, he said. “Moving from (on-premise data centers) to the cloud, customers will spend two to three times more.”

While SAP can continue shifting its existing customers to the cloud to drive business—even with greater competition for slimmer IT budgets—companies like Salesforce have yet to show they can benefit from the AI ​​hype the same way chips and data center companies have.

Moving corporate data and applications to the cloud has been a yearslong process that was accelerated by the pandemic, and it’s now being pushed forward again because of the pressure chief information officers face to implement AI. Most AI innovation is happening in the cloud, Boulan added.

SAP has signaled that it’s preparing for its AI moment: In January, it announced a restructuring plan affecting about 8,000 jobs, and on Monday, revised it to 9,000 to 10,000 jobs. The plan includes “intensifying the shift of investments to strategic growth areas, above all business AI,” Chief Executive Christian Klein told The Wall Street Journal in January.

Last year, SAP made investments in three generative AI companies—Aleph Alpha, Anthropic and Cohere—and appointed Microsoft’s Walter Sun as its global head of artificial intelligence. The company said 20% of all deals in its second quarter “included premium AI use cases.”

While it’s too soon to tell if SAP’s AI features and products will really stick, “SAP’s position as the system of record of choice, which is at the heart of customer data, gives SAP a clear seat at the AI ​​table,” Jefferies analysts wrote in a recent research note.

Another trend working in SAP’s favor: Tech leaders are finally giving priority to the modernization of their ERP systems. ERP applications are the second-most likely to move to the cloud in the next two years, followed by databases, according to TD Cowen’s May survey of nearly 300 companies.

That’s in contrast to “front-office” applications for sales and marketing, which have dropped in importance as many businesses have already moved those functions to the cloud, Cowen analyst Derrick Wood said.

SAP said its cloud revenue was mostly driven by a 33% increase in cloud ERP sales in its second quarter. Total revenue increased by 10% to 8.29 billion euros ($8.99 billion), and beat analyst expectations of 8.25 billion euros. Shares of SAP are up by about 37% this year.

“Our strong Q2 momentum demonstrates the power of our cloud portfolio in the era of AI and lays the groundwork for sustained long-term growth,” said Chief Financial Officer Dominik Asam. “SAP’s pole position in business AI, together with our ongoing transformation program , led not only to robust demand but also boosted our bottom line, allowing us to increase our operating profit ambition for 2025.”