SAP Stock Should Benefit From New Software Release

May.12.10 | About: SAP AG (SAP)

SAP (NYSE:SAP) announced in its recent quarterly earnings that its new version of Business ByDesign software will be ready for mass release by mid-2010. SAP’s Business ByDesign is an on-demand Enterprise Resource Planning (ERP) software that competes with similar offerings from Salesforce.com (NYSE:CRM), Oracle (NASDAQ:ORCL) and Microsoft (NASDAQ:MSFT).

SAP entered the Software-as-a-Service (SaaS) business with the release of its first version of Business ByDesign software in September 2007. However, the mass-ready version of the product was delayed many times due to performance related issues. We believe that the mass release of the upgraded version of Business ByDesign can help SAP to compete better and potentially help it sustain ERP market share.

Key Differences Between On-Premise and SaaS Services

While traditional on-premise software is hosted on the customer’s PCs or servers, SaaS is software that is delivered remotely when needed. Below are the key differences between on-premise and on-demand software:

  1. On-premise software may require the customer to make additional hardware investments in order to have the in-house resources to host the software.
  2. On-demand service is provided through the internet, and the actual data resides on SAP’s hardware infrastructure rather than the customer’s hardware.

SAP Share in ERP Market Expected to Decline

ERP software constitutes about 40% of the $45 Trefis price estimate for SAP’s stock, making it the most valuable business for SAP. Large businesses use ERP software to connect different parts of their databases in order to gain insights into their businesses and offer better service to their customers. For example, a company that has multiple business lines can connect customer and business information from each business in order to spot cross-selling opportunities or in order to identify potential cost savings.

We expect SAP’s share in the ERP market to decline from around 26% in 2009 to around 24% by the end of Trefis forecast period, led by rising competition from Oracle and other smaller players like Infor and Sage.

However, there could be an upside of around 3% to the $45 Trefis price estimate for SAP’s stock if the ‘mass-ready’ Business ByDesign software were to help SAP stabilize its ERP market share instead of decline as we forecast.

There are two main reasons why SAP could benefit from the ‘mass-ready’ launch of Business ByDesign.

1. Complexities of ERP Implementation Will Give SAP an Edge Over Competitors

ERP implementation is quite complex and we believe this is to SAP’s advantage. We believe SAP could leverage its experience handling large on-premise ERP implementations to be the leader in on-demand ERP service. In comparison, SAP’s competitors (Salesforce.com, Oracle and Microsoft) specialize in Customer Relationship Management (CRM) software which is often simpler to implement than ERP software.

2. SaaS Market Expected to Grow Fast

According to Gartner, the worldwide SaaS market could double from $8 billion in 2009 to $16 billion in 2013, representing an annual growth of around 20%. This is a much faster growth in comparison to the single digit growth expected of the traditional on-premise market. An increasing shift toward SaaS could benefit SAP’s market share.

You can modify our forecast above to see how SAP’s stock will be impacted if its ERP market share were to stabilize rather than decline as we forecast.