Imperfect Storm

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What's going on?

Cloud wannabe SAP reported worse-than-expected third-quarter earnings on Monday, and theres a 100% chance its shares suffered their biggest fall since 1999.

What does this mean?

SAP which makes business operations software is Europes biggest technology company by revenue. And while that revenue did fall by 4% compared to the same time last year, it was by no means the only reason the companys stock came crashing down.



See, SAPs increasingly been shifting away from license software and the up-front fees it brings, in favor of the faster-growing but slower-to-arrive profits of subscription cloud services. Combine that with the delay as nervous businesses hold off on investing in new software, and SAPs hand mightve been forced: it scrapped its revenue and profit growth targets altogether for 2023.

Why should I care?

For markets: The best laid plans


SAP currently makes around 30% of its revenue from cloud computing, but its aiming to get that to 60% by 2025 (tweet this). And considering how quickly the market as a whole has been growing, investors have generally been supportive of its plans. But the segment is already showing the company diminishing returns: cloud revenue grew 14% in the third quarter versus the same time last year down from 25% in the first quarter of 2020. And SAP revealed on Monday itll have to invest more in its cloud business than it previously thought if it wants to make it work not exactly something investors wanted to hear.



The bigger picture: Bad first impressions.


With the cloud industry expected to grow 19% annually over the next two years, competition with Salesforce, Oracle, and Microsoft is fierce. But given that SAP is the first to announce its earnings, its hard to say if its been a rough time for the market at large or if its rivals have just been pinching its business. Investors will find out soon enough: Microsoft is set to report its earnings late on Tuesday.

Originally posted as part of the Finimize daily email.

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