This Tech Legacy Is Getting a Boost From AI

By Joel Litman, chief investment officer, Altimetry

SAP (SAP.DE) just became Europe’s most valuable company…

The German tech leader stole the crown from pharmaceutical giant Novo Nordisk (NVO) back in March… after hitting a market cap of €313 billion.

This capped off a 40% rally over the past year. It’s largely thanks to investor enthusiasm around SAP’s cloud transition and, more recently, its steady push into AI.

The company now makes up more than 15% of Germany’s DAX Index, dwarfing the entire auto sector. (The Deutsche Börse marketplace created a new uncapped index just because of SAP’s outsize influence.)

Analysts expect total revenue growth of 13% for SAP this year. The company’s cloud services, including its latest AI product, could expand margins even more.

Yet, despite its elite status, SAP may still be one of the most undervalued large-cap tech names. Today, we’ll explain what’s driving that trend… and what it means for investors.

SAP’s shift from on-site software licenses to cloud-based subscriptions is paying off…

The company’s cloud revenue, which incorporates the AI segment, is expected to rise 27% this year. It already grew 27% in the most recent quarter.

Cloud/AI earnings are stickier than SAP’s software license earnings and generate higher margins. This will surely benefit SAP as its AI products take off…

The company’s newest AI tool lets enterprise users connect external and internal data in real time… enhancing everything from supply-chain management to business forecasting.

Such developments could lock in more customers and strengthen pricing power. They could make SAP’s business more stable, scalable, and profitable.

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We’re already seeing growing customer interest in its AI services. The company’s total cloud backlog (which, again, includes AI) surpassed €63 billion in 2024… It’s up 43% year over year.

And yet, the stock doesn’t reflect all this strength. Shares are still down nearly 3% from their March peak due to market volatility. But the story doesn’t end there…

Many investors simply haven’t priced in SAP’s ongoing AI boost…

We can see this through our Embedded Expectations Analysis (“EEA”) framework.

The EEA starts by looking at a company’s current stock price. From there, we can calculate what the market expects from the company’s future cash flows. We then compare that with our own cash-flow projections.

In short, it tells us how well a company has to perform in the future to be worth what the market is paying for it today.

SAP’s Uniform return on assets (“ROA”) has hovered around 20% for the past five years. Now that the company is scaling its AI technology, analysts expect the Uniform ROA to jump to 27% by 2026.

However, the market thinks SAP’s profitability will stagnate at around 28% by 2029. Take a look…

Although SAP has improved operations, the market still expects modest performance. In reality, its AI innovations could drive stronger returns for years.

Unlike many overhyped tech stocks, SAP has strong fundamentals, real AI products, and growing customer adoption…

Its shift to cloud-based technology has already boosted margins. And now it’s layering in AI tools that make SAP’s software even more valuable.

But the market is still anchored to the past – when SAP focused squarely on legacy software. That’s why we’re zeroing in on the company’s true profitability.

SAP has become Europe’s most valuable company. And its AI-fueled growth is likely to continue… pushing it further into the stratosphere.

However, take note… Even if the market catches on, SAP could remain largely undervalued. And that means investors could get in cheap.

Regards,

Joel Litman
May 8, 2025