TD Cowen upgrades SAP stock to Buy, expects valuations to rise on strong growth

Investing.com — TD Cowen upgraded SAP SE ADR (NYSE:) stock to Buy from Hold and raised its price target to $305 from $240. Analysts at the bank cited SAP’s resilient stock appreciation and growth execution in 2024, along with a positive outlook for the years ahead.

Their optimism is supported by survey data indicating a sharp rise in the priority for Cloud ERP, suggesting that AI has become a new catalyst for ERP migrations.

“The growth acceleration + margin expansion combo is poised to persist through ’27 & put further upward pressure on valuation,” analysts led by Derrick Wood said in a Thursday note.

TD Cowen’s 2025 Software (ETR:) Spending Survey revealed that ERP jumped four spots in ranking for SaaS spend priorities for 2025, now placing third out of eleven categories.

Moreover, quarterly surveys of SAP partners for Q4 indicated an improvement in performance and a healthier growth outlook for 2025, at +7% compared to +2% at the same time the previous year.

The firm believes that the growth resilience observed in 2024 indicates strong durability in Cloud ERP demand, which they expect to accelerate over the next three years. Factors contributing to this growth include 2-3 times revenue conversion on cloud migration, the 2027 end-of-life of SAP’s legacy ECC product, and increasing attach rates of adjacent products.

SAP is also expected to benefit from decreased drags from IaaS and transactional products, and an average selling price (ASP) uplift from new AI/Data offerings.

According to TD Cowen, the company is positioned to benefit from AI in two ways: first, as a catalyst for accelerating Cloud ERP migration, and second, through monetizing GenAI features in its Premium SKU, which carries a roughly 30% price uplift. Early traction for these features has been encouraging, analysts note.

Looking ahead to SAP’s Q4 earnings report on January 28, TD Cowen expects another five-year high in Cloud growth, modeling Cloud growth to accelerate nearly 200 basis points to nearly 29% at constant currency (cc), above Street estimates of approximately 28% cc.

Furthermore, the recent strength of the US dollar is anticipated to provide a solid growth tailwind, prompting TD Cowen to raise its FY25 estimates.

The bank projects that the combination of accelerating growth and margin expansion trends will continue to push SAP’s valuations upward. Growth has increased from low single digits in 2020-2022 to approximately 9-10% in 2023-2024, driving strong multiple expansion.

Going forward, growth is expected to accelerate from approximately 10% cc in 2024 to 11.5%, 13.5%, and 15% over the next three years, with operating margins rising from approximately 23% in 2024 to 27% in 2025 and 29% in 2026. This growth and margin trend supports a forward two-year CAGR of approximately 26% cc in operating profit.

“We think this mix of accelerating growth & margin expansion is a rare combo & poised to continue putting upward pressure on valuations,” analysts concluded.