On Wednesday, CFRA downgraded shares of SAP AG (NYSE: NYSE:SAP) from Buy to Hold, maintaining a price target of $259.00. The firm cited valuation concerns as the primary reason for the downgrade, noting that SAP's forward price-to-earnings (P/E) ratio is currently near historical highs, approximately 40 times on a next-12-month basis, which is significantly above the average of its software peers.
The analyst maintained the 12-month target price based on a P/E of 35.1 times their 2026 earnings per share (EPS) projection, which is above the five- and ten-year historical forward averages of 24.1 times and 22 times, respectively.
This target reflects the anticipated growth from SAP's advancements in AI and cloud technologies. The EPS estimates for 2024 and 2025 remain unchanged at €4.66 and €6.15, respectively. However, the 2026 EPS forecast was slightly increased to €7.18 from €7.03.
Despite the downgrade, the analyst expects SAP's fundamentals to improve between 2025 and 2027. This improvement is projected to come from better visibility and sustained mid-20's percentage growth from SAP's cloud initiatives. These cloud services are anticipated to constitute a larger portion of revenue and are expected to accelerate revenue growth in 2025.
The report also highlighted the potential for expanded partnerships and greater strategic investments as key drivers for AI monetization. The analyst pointed to SAP's innovations with Joule, its digital copilot, and an increased focus on AI agents as factors that could contribute to the company's growth in the coming years.
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