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SAP’s Application Software Business Worth More Than Oracle's

Posted
9/21/2010 2:29:00 PM
By: Trefis
Referenced Stocks:CRM;ORCL;SAP

SAP ( SAP ) and Oracle ( ORCL ) are the two biggest players in the enterprise application software market. SAP mainly sells application software solutions, while Oracle's business is much more diversified, including database software and middleware along with customer-facing applications. Having acquired Sun Microsystems last year, Oracle is now in the hardware business as well, selling servers and storage products loaded with its own software.

We estimate that SAP's applications software business is worth about $62 billion, versus $45 billion for Oracle's application software business. Our analysis follows below.

Application software primer

SAP and Oracle compete in several business software application segments, including enterprise resource planning (ERP), customer relationship management ( CRM ), business intelligence (BI) and supply chain management (SCM). Here's a quick guide for the uninitiated:

  1. ERP software is used to integrate an organization's data and processes into  single system.  For example, a bank might use ERP software to integrate its credit card and savings account systems.
  2. CRM software helps companies manage sales information such as leads, transaction history and communication history. Companies also use CRM apps to acquire and retain customers and gain marketing insights.
  3. BI software enable companies to make better decisions by identifying cost savings and growth opportunities.
  4. SCM software tracks raw materials, work-in-process inventory, and finished goods from point of origin to point of consumption.

Oracle vs. SAP

We estimate that the application software business constitutes around 25% of the $35 Trefis price estimate for Oracle's stock . We expect Oracle's new application software license revenues to increase from $2 billion in 2009 to around $2.8 billion by the end of the Trefis forecast period. You can drag the trend-line in the chart below to create your own application licensing revenue forecast for Oracle and see how it impacts the company's estimated share value.

Oracle earns significantly more revenues from support and license renewals. We estimate that Oracle will earn around $6.2 billion  from support and license renewals in 2016, the last year of the Trefis forecast period.

As shown in the table below, we expect that SAP's revenues will be more than twice the size of Oracle's by the end of the Trefis forecast period. However, we expect SAP's gross profit margins to lag Oracle's margins significantly. As a result, our projected valuation of SAP is only about 27% higher than our valuation of Oracle.

Application Software business (2016 projections) Revenues Gross Margins Profits Valuation
Oracle $9 billion 95% $8.5 billion $45 billion
SAP $19.7 billion 84% $14.1 billion $62 billion

SAP leads Oracle in terms of market share

Market Share (2016 projections) ERP CRM BI SCM
Oracle 15% 17% 18% 17%
SAP 24% 19% 24% 25%

As you can see in the table above, we expect SAP's market share to exceed Oracle's in each of the four main enterprise application categories by the end of our forecast period. ERP software is SAP's most valuable business, contributing around 39% to the $52 Trefis stock price estimate . However, we expect SAP's ERP market share to decline from 26% in 2009 to 24% by 2016.

You can see the complete $52 Trefis Price estimate for SAP's stock here .

You can see the complete $35 Trefis Price estimate for Oracle's stock here.