By: Trefis Team
SAP, the Germany-based software giant, has been performing well over the last couple of years, with its stock gaining over 50% during this period. The company’s revenue has grown at a compounded rate of 11% annually over the last three years, driven by its strong foothold in the Enterprise Resource Planning and Supply Chain Management software markets. Having dominated the ERP software space for a while, SAP now plans to exploit the Customer Relationship Management software market. For this, the company plans to double its CRM business in the next two years by offering bundled back-office services, such as sales and marketing, customer service, and data protection, through its new cloud platform S/4HANA. Given the depth of SAP’s presence in the ERP market, it might be easier for the company to penetrate into the CRM market and capture a sizeable share of the market from its current leader, Salesforce.com.
We currently have a price estimate of $120 per share for SAP. Below, we present how a rise in SAP’s CRM market share could result in a potential upside for its investors. You can view our interactive dashboard for SAP and modify the revenue, earnings, and share count numbers to visualize their impact on its valuation.
Why Is SAP Focusing On The CRM Market?
SAP’s ERP software business has been the key driver of its growth in the recent past. Through its ERP software business, the company provides software to enterprises that helps them operate their back-office functions such as finance and supply chain management. Based on our estimates, the ERP business contributes about 26% of SAP’s overall revenue as well as valuation. Given that a majority of businesses require back-office services for their daily operations, there is a huge demand for ERP software globally. Per Gartner, the ERP software market is expected to reach $39 billion by 2021.  Consequently, SAP has continued to grow its share in the ERP software market through integrated and innovative solutions over the last few years.
However, the CRM software market has been growing at a fast-pace and seem to offer a larger growth opportunity compared to the ERP software market. Per Gartner, the global CRM market is expected to reach $66 billion by 2021. At present, SAP holds only 8.5% of the CRM software market, which is less than half of the market leader, Salesforce.com. Thus, in order to capitalize on this lucrative opportunity, SAP is planning to expand its CRM software business in the near term.
In an interview with Reuters, SAP’s Customer Experience Head, Alex Atzberger, highlighted the company’s plans to double its presence in the CRM market over the next two years. He also pointed out that the company plans to bundle up functions like sales and marketing, commerce, customer service, and consumer data protection tools into its new S/4HANA suite to penetrate deeper into the CRM market. The company aims to outgrow the market and overtake its competitors, particularly Salesforce.com.
Using our interactive dashboard for SAP, we have created a scenario where SAP is able to expand its CRM market share to 14% in 2018, as opposed to our base case estimate of 10%. In this case, SAP’s price estimate will increase to $127 per share, based on 2018 P/E Multiple. Also, SAP’s CRM software business will contribute around 20% of its value in this case, instead of 15% of its value under our base case.