SAP Down to Strong Sell, Cloud Transition Remains Concern - Analyst Blog

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Zacks Investment Research downgraded SAP SE ( SAP ) to a Zacks Rank #5 (Strong Sell) on Nov 12.

Why the Downgrade?

SAP has been witnessing downward estimate revisions in spite of delivering a strong third-quarter 2014 with growth across both top and bottom lines.

Recent acquisitions of the company and its transition toward the cloud-based software technology are expected to weigh on its margins, at least in the near term. Presently, SAP has been receiving a major portion of its revenues from its on-premise products. The ongoing shift toward cloud-based technology limits the company's visibility in future. SAP's cloud based platform, SAP HANA, has been performing well. Moreover, the company's persistent focus on establishing itself as a cloud-based software technology was reinforced by its announcement of the $8.3 billion acquisition of Concur Technologies, Inc ( CNQR ).

However, considering the costs for shifting towards cloud and integration related costs, the company downgraded its fiscal 2014 guidance for operating profit to a range of €5.6 - €5.8 billion at constant currency, compared with the earlier range of €5.8 - €6.0 billion.

Moreover, currency volatility in the first half of fiscal 2014 has produced an unfavorable impact on SAP's revenues. In the third quarter, currency translations had a negative impact of 3% and management expects another 3% impact in the fourth quarter of 2014 as well.

All these factors triggered a downtrend in the Zacks Consensus Estimate. The downward estimate revisions over the last 30 days caused a 3.6% decline in the Zacks Consensus Estimate for 2014 to $3.58 per share, whereas for 2015, the Zacks Consensus Estimate slipped 7.4% to $3.93 per share.

Other Stocks to Consider

Two better-ranked stocks in the sector include Actuate Corporation ( BIRT ) and MicroStrategy Inc. ( MSTR ), both sporting a Zacks Rank #1 (Strong Buy).

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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.

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

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