Hosted Software Failure Could Hurt SAP's Stock

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SAP's ( SAP ) new web-based business apps have yet to achieve marketplace traction, according to a recent Wall Street Journal report. Called Business ByDesign, the hosted suite is intended to help SAP tap the burgeoning software-as-a-service (SaaS) market.

When SAP released the beta version of BusinessByDesign in late 2007, the company set a goal of signing up 10,000 business customers by 2010.  But the service was plagued by performance issues, and a mass-market version didn't appear until July 2010 . To date Business ByDesign has only attracted about 100 business customers, according to the Wall Street Journal.

SAP makes most of its money selling traditional shrink-wrapped software that customers host on their own systems. Business ByDesign represents an important step beyond this declining market, and its failure could hurt SAP's stock. Our analysis follows below.


SAP Market Share expected to decline

The SaaS market has grown quickly in recent years,  from around $5.1 billion in 2007 to $7.5 billion in 2009, according to Gartner research . Total SaaS sales are expected to reach $16 billion by 2013, according to another Gartner report. SAP's main competitors in this space include NetSuite ( N ), Salesforce.com ( CRM ), Oracle ( ORCL ) and Microsoft ( MSFT ).

Business ByDesign includes hosted versions of several SAP applications, including Enterprise Resource Planning (ERP), Customer Relationship Management ( CRM ), Business Intelligence (BI), Supply Chain Management (SCM) and Product Lifecycle Management ( PLM ).

ERP software constitutes about 39% of the $52 Trefis price estimate for SAP's stock, making it the company's most valuable business line.  Large businesses use ERP applications to connect different databases in an effort to gain business insight and improve customer service. For example, a company with multiple business lines might use an ERP app to synthesize customer and business information from the different businesses in order to spot cross-selling opportunities or identify potential cost savings.

We currently expect SAP's share of the global ERP market to decline from around 26% in 2009 to around 24% by the end of our forecast period.

However, the initial flop of Business ByDesign suggests that SAP could lose further ground in the highly competitive application software market. There could be a downside of around 5% to the $52 Trefis price estimate for SAP stock if its ERP market share declines to 20% by 2016, instead of the 24% that we currently forecast. You can drag the trend-line in the chart above to create your own ERP share forecast for SAP and see how it impacts the company's stock.

You can see the complete $51.94 Trefis Price estimate for SAP's stock here.



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.




This article appears in: Investing , Investing Ideas , Stocks , US Markets

Referenced Stocks: CRM , MSFT , N , ORCL , PLM , SAP

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