SAP: weak forecast sends valuation plummeting by $35 billion in one day

SAP will focus on cloud growth in the future - but currently faces a revenue delay as customers are avoiding risky cloud migrations

German enterprise software giant SAP plans to speed up the shift to cloud-based delivery of its enterprise products, in an effort to drive significant new revenues over the longer term.

SAP reported its Q3 results on Sunday, slashing its revenue and profit forecasts for the rest of the year while also revising its 2021 outlook down due to the fresh wave of Covid-19-related lockdowns in various countries.

The report was disappointing for investors, with revenues falling 4 per cent YoY to €6.5 billion; cloud and software revenue down 2 per cent; and operating profit down 12 per cent. The only good news was from SAP's pure-cloud unit, revenues for which grew 11 per cent to €2 billion.

Following the gloomy result, SAP's market valuation plunged by more than €30 billion (21 per cent) on Monday, sending a warning signal to investors about the health of the enterprise software industry.

For SAP, it was the company's worst trading day in the last 12 years.

The results threatened the assumption that technology firms should grow during Covid-19 pandemic, as millions of employees are working from their homes.

"As the CEO of SAP, I have to be focused on the long-term value creation of this company," CEO Christian Klein told CNBC's" Squawk Box Europe" on Monday. "So I cannot trade the success of our customers and the significant revenue potential of SAP against short-term margin optimisation."

According to analysts, SAP has been facing a cloud revenue delay as customers are avoiding major decisions about shifting to the cloud during a pandemic, which continues to limit a global economic recovery.

SAP believes that its existing customers will eventually shift to the cloud as the impact of the pandemic begins to weaken, driving new revenues over the longer term. The firm expects its cloud revenues to increase to over €22 billion by 2025.

However, the move to the cloud will also cause SAP's 2023 operating margin to fall by approximately 4 to 5 percentage points.

"After 2022 momentum will pick up considerably, though," SAP CFO Luka Mucic said in a conference call with analysts on Monday.

"Initial headwinds of the accelerated cloud transition will start to turn into tailwinds for revenue and profit. […] That translates to accelerated revenue growth and double digit operating profit growth from 2023 onwards," he added.