Is SAP SE a Buy as Stock Plunges on Depressed Outlook?

SAP SE is a German software giant. SAP SE's stock price was trading down by more than 20 percent after it reported its third-quarter results. What caused the huge drop in SAP stock? How were the company’s results? Can the stock recover in the short to medium term?

SAP SE is a German software company, which is known for its ERP (enterprise resource planning) software. It is Europe’s largest software company with about 200 million users worldwide. SAP stands for Systems, Applications, and Products in Data Processing. The company was founded in 1972 in Walldorf, Germany. It now has offices around the world. It has over 440,000 customers in 180 countries. 

SAP reported its third-quarter results on Oct. 25. The adjusted EPS was $1.98, which was higher than analysts’ consensus expectation of $1.54. The company's revenues of $7.64 billion fell short of analysts’ estimate by 5 percent. While SAP's earnings weren't much of an event, the stock fell due to management’s comments during the earnings call and the outlook.

SAP slashed its fiscal 2020 predictions significantly. The company expects revenues of 27.2 billion–27.8 billion euros, which is lower than its previous guidance of 27.8 billion–28.5 billion euros. 

SAP mentioned in a statement that its previous outlook “assumed economies would reopen and population lockdowns would ease, leading to a gradually improving demand environment in the third and fourth quarters.” The company also said that “lockdowns have been recently re-introduced in some regions and demand recovery has been more muted than expected.” SAP doesn’t expect any meaningful recovery in SAP Concur business-travel related revenues. SAP Concur helps companies manage travel expenses.

Since SAP expects the depressed demand to continue for some time, it scrapped its targets for 2023, which it announced last year. 

The cut in forecasts caused SAP SE’s stock price to fall. The stock dropped nearly 20 percent due to the depressed business outlook. The company expects the depressed demand to continue through at least the first half of next year. The prolonged impact of the COVID-19 pandemic on SAP's outlook sent its stock price spiraling down. At 8:32 a.m. ET, SAP’s stock price was trading with losses of 21 percent in pre-market trading at $118.21 on Oct. 26. 

Currently, 31 analysts cover SAP. Among the analysts, 20 recommend a buy, eight recommend a hold, and three recommend a sell for the stock. The consensus average target price of $166.72 implies a potential upside of 11.4 percent for the stock. 

The company was holding up relatively well until now, which earned it a consensus buy rating. Since the company has downgraded its guidance due to the depressed outlook, we could see downgrades from analysts as well.

While the market was expecting a weaker outlook from the company, the current outlook is even worse than the market expected. Although the company has good long-term fundamentals, its stock will likely remain depressed in the short to medium term.