SAP Looks to Tap New Markets for Growth

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SAP ( SAP ) recently announced its Q4 2010 earnings and highlighted that it has been focusing on innovation to grow its top line and profitability, which helped in generating strong sales growth. Management stressed on the fact that its customer-focused strategy to provide solutions to customers on-premise, on-demand and on-device has started to find broad market acceptance. SAP mainly competes with Oracle ( ORCL ), Microsoft ( MSFT ), Salesforce.com ( CRM ) and IBM ( IBM ) in the applications software market, which consists of various applications like Enterprise Resource Planning (ERP), Customer Relationship Management ( CRM ) and Business Intelligence (BI) to name a few.

On-premise and on-demand are two modes of product implementations. In on-premise product implementation, the software is installed onsite while in on-demand or software as a service (SaaS), the software is installed remotely on third-party servers, or the cloud.

On-device is the main innovation that SAP talks about where SAP has developed the capability of delivering applications' access on mobile devices (See SAP Will Leverage Sybase To Deliver Business Apps on Smartphones ). On-demand and on-device are higher growth areas for SAP than its core businesses which are expected to grow at high single digits. We have a $64.85 Trefis price estimate for SAP stock , which is about 10% higher than the current market price.

SAP tries to compete in the applications software market

Among its applications, ERP software is the most valuable business for SAP and accounts for around 37% of our estimate for SAP stock. Historically, SAP's market share in ERP software business has declined from around 29% in 2005 to around 27% in 2010 as per our estimate, and we expect this decline to continue to around 25% by the end of Trefis forecast period.

The company has made some progress in tapping high growth areas of on-demand and on-device over the last few months. According to management, its on-demand product Business ByDesign has started to gain traction, and the company was able to more than double its Business ByDesign customers from around 100 in mid-2010 to 250 by the end of 2010. SAPalso mentioned that it is looking to increase this number to around 1,000 by the end of 2011. ((ref:1))

A few weeks back, we discussed that it will be critical for SAP to leverage the fast growing SaaS market that it could achieve through Business ByDesign (See Leveraging SaaS Market Growth Critical For SAP Stock ). Another product that SAP has brought is through the introduction of HANA (High Performance Analytic Appliance), which speeds up data storage and retrieval to unprecedented levels (See SAP Widening its Lead in Business Intelligence for more details on HANA) by using in memory technology.

Can these new products actually result in faster revenue growth and higher profitability?

If SAP successfully taps into these newer growth markets, it's stock could get a boost. For example, there could be an upside of 10% to our estimate for SAP stock, if its ERP market share increases to around 30% by the end of Trefis forecast period, instead of the decline that we forecast.

See complete $64.85 Trefis Price estimate for SAP stock .




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 , IBM , MSFT , ORCL , SAP

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