Is SAP undervalued?

I recently valued SAP using a 10-year DCF. SAP traded at around $155 when I completed the valuation and my base-case DCF gives an intrinsic value of roughly $260 per ADR, implying a 40.4% margin of safety (my cut-off for deeply undervalued is >40%). The scenario range is: \- Bear case: $141 \- Base case: $260 \- Bull case: $349 The gap comes mainly from revenue growth and mature operating margins. I kept the WACC unchanged across all three scenarios to isolate the impact of business performance. # Revenue assumptions SAP generated €36.8 billion of revenue in 2025. For 2026, I forecast €40.15 billion, equal to 9.1% reported growth. That is below SAP’s expected constant-currency growth because prevailing exchange rates were expected to reduce reported cloud and software growth by around 1.5 percentage points. I also avoided anualising the unusually strong first quarter where total revenue grew 12% at constant currencies, Cloud revenue grew 27% and Current cloud backlog grew 25%. Management had already warned that cloud growth would moderate in the second quarter and I believeb the main offset is cannibalisation. Cloud subscriptions are replacing declining licence and software-support revenue, so strong cloud growth doesn't flow through to consolidated revenue at the same rate. I model revenue growth accelerating to 10.5% in 2027 as the cloud backlog converts into recognised revenue. Growth then gradually slows in my model as SAP’s cloud business becomes larger and the migration cycle matures. The model gets to: \- €56.7 billion of revenue in 2030 \- €71.8 billion in 2035 \- A ten-year revenue CAGR of 6.9% \- Growth of 3.5% in the final explicit year This assumes continued support from pricing, customer expansion, new products and some AI monetisation, and it's also accounting for the fact that SAP will be a much larger and more mature company by the end of the forecast. # Margin assumptions I use an IFRS EBIT margin of 28.5% for 2026. SAP reported a 28.7% margin in Q1, but the quarter benefited from a €135 million YoY reduction in SBC. I believe using 28.5% allows for currency pressure, acquisition-related expenses and normal quarterly variation... This produces: \- Revenue: €40.15 billion \- EBIT: €11.44 billion \- NOPAT: €8.13 billion I gradually expand the IFRS EBIT margin to 33% by 2034. The key assumption is operating expenses growing more slowly than revenue, especially across sales, marketing, R&D and administration. SAP is also targeting more than €2 billion of annualised internal AI efficiencies by the end of 2028. There is a meaningful headwind here. SAP’s 2025 cloud gross margin was 73.9%, compared with 88.6% for software licences and support. So, that's pretty self-explanatory. The 33% mature margin is therefore my own base-case assumption and I'd like to see what you think. I think a reasonable range to test is roughly 31% to 35%... # Free cash flow I calculate FCFF as: NOPAT + D&A - cash capex - lease reinvestment - change in working capital SBC remains an operating expense and isnt added back. SAP benefits from negative working capital ( customers often pay subscription and support fees in advance). Operating working capital was around negative 10.8% of revenue in 2025. I gradually normalise that to negative 9% by 2035, reducing the cash-flow benefit as the company matures. Lease reinvestment is modelled at 1% of revenue. Lease liabilities are later deducted in the equity bridge. Under these assumptions, FCFF grows from €8.41 billion in 2026 to €16.84 billion in 2035. The increase is driven mainly by revenue growth and the assumed EBIT margin expansion. # WACC and terminal value The DCF is done in euros, so the discount-rate inputs are also euro-denominated. My WACC assumptions are: \- German 10-year Bund yield: 2.95% \- Equity risk premium: 4.23% \- Normalised beta: 1.15 \- Cost of equity: 7.81% \- Pre-tax cost of debt: 3.5% \- Capital structure: 94% equity and 6% debt and leases This produces a WACC of 7.49%. For the terminal value, I use a perpetual growth rate of 2.5%. The 2036 assumptions include a 33% EBIT margin, 28% tax rate, capex and D&A both equal to 2% of revenue, lease reinvestment equal to 1%, and working capital equal to negative 9% of revenue. Normalised FCFF comes to roughly €16.9 billion. That gives: \- Terminal value: €338.7 billion \- Present value of terminal value: roughly €170.1 billion \- Present value of explicit cash flows: €87.5 billion \- Enterprise value: €257.7 billion The terminal value represents around 66% of enterprise value. That is the main weakness in the model, because the result is highly sensitive to the mature margin, WACC and perpetual growth rate (as it usually is...). # Equity bridge and result I assume roughly zero pro forma net cash or debt after accounting for SAP’s dividend, repurchases, bond issuance and the undisclosed Reltio acquisition price... Equity investments are included at 80% of carrying value. The model uses approximately 1.158 billion diluted shares. The final result is approximately: # $260 per ADR Against the $155.09 market price (Friday's close), that implies a margin of safety of 40.4%. On my valuation scale: \- Below $221: undervalued, with at least a 15% margin of safety \- Below $156: deeply undervalued, with at least a 40% margin of safety # Scenario comparison The bear case assumes a 4.1% revenue CAGR and a mature EBIT margin of 25%. That produces a value of $141. The base case (described above) assumes a 6.9% revenue CAGR and a 33% margin, producing $260. The bull case assumes an 8.4% revenue CAGR and a 36.5% margin, producing $349. At $155, the shares sit only around 10% above my bear-case value, so there's limited downside protection if growth disappoints and margins decline towards 25%. The base case still offers substantial upside, but it depends heavily on SAP converting its cloud backlog, maintaining mid-to-high single-digit growth and expanding margins through operating leverage. For me, the mature margin is the number to watch most closely. Revenue growth alone wont be enough if the changing revenue mix prevents margins from moving beyond current levels. And of course, the successful execution of transition... What do you think? Will the deeply embedded moat prevail and make a turnaround and if so, what's your fair value? Are you holding or buying / not touching? \-------------------- (if anyone's interested in the whole calculations and assumptions with tables, you can check it out here: https://open.substack.com/pub/hatedmoats/p/sap-dcf-valuation ; no need to follow anywhere, everything important is already here in the post)