- Spot +30% YtD, 3rd best performer in the SX5E, at a full valuation of 33x P/E (60% premium to average)
- Upside capped – guidance reflected in consensus forecasts. Downside risk from further Tech sector selloff
- 3M ATM 110-100 skew at 2YPc78, reflecting stretched optimism. Attractive to finance downside bets
In line with our broader macro view, as set out in our note A not-so-big-short 3.0 – Asymmetric risks to the downside and 10 + 1 reasons to worry, we anticipate broader Tech sector weakness, mainly on the back of an overextended Tech positioning and deteriorating seasonals moving heading into August. SAP has currently retraced 5% from its all-time high and is currently at local support of EUR180 (Figure 3) and a further sell-off of the broader Tech sector risks pushing the stock below this level, causing a price acceleration to the downside to the next support level of c.EUR165. The RSI, currently at 44, also points to further room for downside.
Looking beyond the recent price action, SAP has posted a return of c.30% YtD, one of the best-performing stocks in the SX5E (+7.7% YtD) on the back of stellar annual growth of 20%+ (Figure 4 and 6) in its Cloud revenue (44% of 2023 revenue) over the last two years and is currently trading at a P/E of 33x, a 60% premium to its long-term rating (Figure 2). The market forecasts what may well be an optimistic annual growth in cloud revenue of 26%+ in both 2025 and 2026, in line with company guidance, leaving limited room for upside surprises. Recently its peer, Salesforce, gave weaker-than-expected guidance for the quarters ahead, on the back of weak spending, denting optimism on the ability of generative AI to boost returns at its key Data Cloud unit, leading to a sell-off in the broader Software sector (Figure 5). SAP, however, reiterated its 2025 guidance of >EUR21bn of Cloud revenue at its Sapphire conference in early June, boosting the share-price outperformance vs. the sector.
SAP reports its 2Q24 results on 22 July, and options are pricing an earnings move of 5.7% (average: 3%) implying an upside move to EUR190, the stock’s all-time high. Although 3M ATM volatility is expensive, Call skew (110-100) is at 2YPc78 (Figure 7) swaying our preference to finance puts by selling the upside. We propose buying 2x Sep24 160 Puts financed by selling 1x Sep24 190/200 call spreads at a net credit of 0.42% (Spot ref:180.6, Fut. ref:182.1). Should the price drop by 10% the puts would return c.7x on premium employed.