German software corporation SAP has announced that it is postponing profitability targets because the company has underestimated how long recovery from the corona pandemic would take. The company will put more emphasis on cloud computing.
After the announcement, the value of SAP shares plummeted. Because of this 20 percent drop, the company is worth about 29 billion euros less. JP Morgan responded by lowering its price target for SAP shares from 160 to 120 euros and labelled them ‘overweight’ instead of the previous ‘neutral’.
Effects of corona pandemic
In the announcement, the company told that it initially expected economies to reopen, and lockdowns would become less strict. In that case, demand for SAP’s services would have risen in the third and fourth quarters, Bloomberg writes.
However, this didn’t happen: the second wave of corona infections is swooping across the world, and many countries are tightening measures to fight the further spread of the virus.
Instead of the previously estimated 27.8 to 28.5 billion euro revenue, SAP now expects to make about 27.2 to 27.8 billion euros. SAP also initially expected the Concur software for expense management to become more profitable later this year, but that’s also off the table now.
Financial targets postponed by two years
In response to the disappointing results, SAP postponed its revenue targets for its cloud services by two years. Furthermore, the company announced that it moved expectations to meet its 2023 strategy plan out to 2025. CEO Christian Klein said that he expects the company to make a small recovery in the first half of 2021.
Shift from licenses to subscriptions
For many years, the bulk of SAP’s revenue came from license sales. The company expects to generate more revenue from subscription models in de coming years, eventually eclipsing its license sales.