Leveraging SaaS Market Growth Critical For SAP Stock


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SAP ( SAP ) competes with Oracle ( ORCL ), Salesforce.com ( CRM ) and Microsoft ( MSFT ) in the applications software market and as competition mounts in this segment, SAP will need to fight to maintain its market share. Oracle claims that it is consistently gaining share from SAP in the applications software market whileSalesforce.com, a cloud computing player, has successfully leveraged the burgeoning cloud computing market, and hence has been able to gain market share at the expense of its peers as well.

Currently we forecast that SAP's market share in the most important applications software market Enterprise Resource Planning (ERP) and Customer Relationship Management ( CRM ), will continue to decline. Here we analyze the upside and downside scenarios that could govern the direction of the $57.49 Trefis price estimate for SAP stock , which is about 7% above the current market price.

-5% downside - Market Share Losses on CRM Competition

Companies often target all customers equally, irrespective of their needs. This often leads to resource inefficiencies and customer dissatisfaction. CRM is a software which helps companies acquire and retain customers, gain marketing and customer insight. Without the help of the CRM software, it becomes almost impossible to keep track of individual requirements.

We estimate that SAP share in the CRM market has declined from around 26% in 2005 to 22% in 2010, and we expect it to continue to decline to around 18% by the end of Trefis forecast period.

Pure cloud computing players like Salesforce.com have an advantage over SAP as it can benefit from the expected growth of software as a service (SaaS) market. SaaS works on the on-demand principle, which means that the enterprises can license only the amount of software required versus the traditional way of procuring the license per device.

According to Gartner, the SaaS market grew at 18% from $6.4 billion in 2008 to $7.5 billion in 2009, and could continue to grow $14 billion by 2014. A recent Gartner report shows that SaaS market growth momentum has not slowed down. Additionally, Oracle has claimed that it is not only winning market share from SAP, but also selling software at a higher margin. These factors could mean that SAP's market share could decline at a faster pace than our expectations.

There could be downside of more than 5% to our estimate for SAP stock if its CRM market share declines to 13% by the end of Trefis forecast period.

+3% upside - New ERM Initiatives to Help ERP

Companies generally face the problem of maintaining different systems deployed on different platforms and technology. This creates resource inefficiencies and end customer dissatisfaction. Enterprise Resource Planning or ERP is software used for integrating the data and processes of an organization into one single system. We estimate that SAP's share in the ERP market has declined from around 29% in 2005 to 26% in 2010, and we expect it to continue to decline to around 24% by the end of Trefis forecast period.

SAP's Business ByDesign is the SaaS application software that was released in July 2010. This hosted suite software is intended to help SAP tap the growing Software as a service (SaaS) market. However, this service had some performance issues during the initial months of its release. Assuming SAP rectifies these issues and increases its presence in the ERP SaaS market, there could be upside of around 3% to our estimate for SAP stock if the company is able to maintain its share in the ERP market going forward.

You can see the complete $57.49 Trefis Price estimate for SAP stock here .

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

This article appears in: Investing , Investing Ideas , Stocks , US Markets
More Headlines for: CRM , MSFT , ORCL , SAP

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