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We came across a bullish thesis on SAP SE (SAP) on Substack by Northwest Frontier Capital. In this article, we will summarize the bulls’ thesis on SAP. SAP SE (SAP)'s share was trading at $288.87 as of Feb 11th. SAP’s trailing and forward P/E were 105.82 and 44.25 respectively according to Yahoo Finance.
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SAP's recent results may have prompted muted reactions due to concerns over a slight deceleration in cloud backlog growth for 2025, but this narrow perspective misses the bigger picture. SAP is executing at an exceptional level, positioning itself for sustained revenue acceleration, margin expansion, and a significant AI-driven opportunity. The company has now delivered 11 consecutive quarters of stable or accelerating cloud backlog growth, expanding from €8 billion to €18 billion, defying early skepticism about its ability to transition customers to the cloud. This success stems from SAP’s commitment to transforming its core ERP product into a cloud-native solution through S/4 and guiding customers through complex cloud migrations with its RISE program. The result has been a formula that continues to drive growth and enhance customer retention, a trend SAP’s leadership expects to strengthen further.
CEO Christian Klein underscored this momentum by highlighting that retention rates are improving, cloud revenue growth remains strong, and adoption rates continue to rise. While some peers, such as Microsoft and ServiceNow, have faced challenges selling AI-driven products to enterprises, SAP benefits from its ability to sell full-scale cloud transformation, a trend reinforced by recent strong results from Atlassian. This confidence is also reflected in SAP’s long-term revenue opportunity. The company estimates a 3x cloud conversion multiple, meaning that converting the remaining €11 billion in maintenance revenue could yield an additional €33 billion in cloud revenue over time. This presents a substantial growth runway, with SAP well-positioned to capitalize on it.
Beyond revenue expansion, SAP’s margin story is an equally compelling yet underappreciated aspect of its transformation. The company’s cloud gross margin rose 1.4 percentage points to 73.3% in 2024, driven by infrastructure optimization, scale benefits from its centralized HANA database, and increased adoption of multi-tenant architectures. As a result, operating profit surged 25% to €8.15 billion, underscoring the efficiency gains from SAP’s transition. These trends align with past cloud transformation success stories. When comparing SAP’s operating margin trajectory to those of Microsoft, Adobe, and Autodesk—companies that underwent similar transitions—SAP’s current margin expansion of four percentage points is still in its early stages. Historically, cloud transitions have led to margin expansions of around 15 percentage points over time. Given SAP’s execution and ongoing cost efficiencies, margins have significant room for further growth, a factor not yet fully reflected in investor sentiment.