SAP (NYSE:SAP) is the biggest non-US software company in the world by revenue and the largest one in Germany by market cap. At its current stock price of roughly €115 a share, its valuation is higher than $150 billion.
That is not much higher than its Dot-Com bubble peak at €77.50 a share in 2000, highlighting the dangers of participating in irrational exuberance. Investors usually have to wait a long, long time to break even, practically guaranteeing below-average returns.
The purpose of this article, however, is not to provide a financial history lesson, but to take an Elliott Wave look at SAP stock today. The weekly chart below reveals the structure of the post-2002 uptrend for us.
It took SAP just two year to fall from its 2000 bubble top of €77.50 to as low as €9.95. Fortunately, the company had no problem surviving. Its business’ growth over the years eventually helped the stock rise to new records, as well. In mid-2020, it reached an all-time high of €143.32 a share.
SAP Stock Can Tumble 35% Before the Bulls Return
As the chart above shows, that 18-year rally looks like a textbook five-wave impulse. The pattern is labeled (1)-through-(5), where four lower degrees of the trend can be traced within wave (3). The five sub-waves of wave (1) are also visible. Wave (2) culminated in the 2008 Financial Crisis, while wave (4) materialized during the Covid selloff.
If this count is correct, the surge to over €143 must be the final wave (5) of the sequence. A three-wave correction follows every impulse. In this sense, the sharp plunge to under €90 a year ago is not a surprise. It is labeled as wave (A) of a bigger retracement that is still in progress. The 2021 recovery to €129.74 must be wave (B), meaning more weakness in wave (C) can now be expected.
Wave (C)’s natural targets lie below the bottom of wave (A), so it makes sense to prepare for a decline to less than €90 a share. We think the price can keep falling until it reaches the support level of the Dot-Com bubble peak near €75. From the current €115, this translates into a 35% drop.