SAP – a global powerhouse
Founded in 1972 and headquartered in Germany, SAP is one of the world’s largest providers of fully integrated enterprise resource planning (ERP) software, including finance, sales, accounting, human resources and supply chain management and perhaps most importantly, 77 per cent of the world’s transactions hit a SAP system.
Since its launch in Australia on 15 March 2021, the Polen Capital Global Growth Fund has generated a return of 16.58 per cent after all fees to 31 July, 2021 outperforming its benchmark the MSCI ACWI Net Total Return Index by 3.34 per cent.
SAP (NYSE:SAP) is one of the world’s leading producers of software for the management of business processes and is in the portfolio of the Polen Capital Global Growth portfolio today.
SAP is nothing if not a global powerhouse. SAP has been a trusted brand for over two-thirds of Forbes 2000 companies who rely on SAP’s software to run the world’s most mission critical processes. SAP has offices in 180 countries, has over 425,000 customers, over 40,000 enterprises, more than 100,000 employees.
SAP’s suite of products once installed allows, for example, a salesperson’s input about a poorly performing product into the CRM to be seamlessly and immediately communicated to Product Development and Supply Chain departments.
If agricultural machinery manufacturer John Deere wants to evolve from selling a simple tractor to an internet connected model, SAP’s products allow John Deere to sell a tractor with guaranteed 100 up-time along with a recurring revenue service package. This is achieved by installing sensors linked to Deere’s SAP ERP software. John Deere is informed ahead of time of required repairs and SAP’s temporary workforce application (FieldGlass) schedules the necessary workers, informs the customer, and coordinates the supply chain to supply the necessary parts.
SAP’s seamlessly integrated end-to-end suites of application and services is allowing half a million business and public customers to operate profitably, adapt continuously, and make a difference.
Barriers to entry
SAP’s economic and business moat – the barrier to entry that protects it – is a business model with high switching costs and its global scale. This moat, along with the advent of cloud computing, produces 70 per cent (and growing) recurring revenue annually and mid-single digit pricing power.
As an example, of the entrenched and high switching costs, once Nestle installs SAP’s ERP, it becomes the lifeblood of Nestle. If SAP ceases function, so does Nestle. A highly customised solution means changing providers is akin to ripping out the plumbing in your house while trying to keep the home fully functioning. SAP enjoys the benefit of some of the highest switching costs we have identified anywhere in the world.
Of course, once SAP is installed, being cross-sold and/or up-sold additional software including CRM, Procurement, Customer Experience, Data Analytics, at low prices (but super high margins for SAP) is a relatively straightforward decision for the customer. SAP have demonstrated this dynamic over decades.
A global army of sales professionals, research and development engineers and a global ecosystem of third party consultants such as Accenture help sell, implement and customise SAP’s products.
The runway for growth also remains long. The industry is experiencing high single digit growth. Enterprise Resource Planning software alone is a circa US$75 billion+ market, and with a 27 per cent share SAP and its largest rival Oracle (21 per cent market share) command a total share of less than 50 per cent of the total addressable market.
Meanwhile, the increasing ubiquity of technology and its rising importance and necessity in business demanding increasing customisation ensures an enduring offering for SAP.
The COVID-19 pandemic has demonstrated SAP’s resilience and the team at Polen expect this to continue in the future as their customers see the value of a modern ERP solution and have a “do or die” urgency to digitally transform into an intelligent enterprise.
An investment in SAP provides exposure to a company with a powerful combination of a fast-growing cloud business and a solid core suite of solutions. Polen expect the beneficial upgrade cycle and cloud transition to improve margins and drive an even-higher share of predictable revenues.
The company is attractively valued and given the high switching costs and mission-critical nature of their services, SAP is a stock that continues to display strong safety-like characteristics.
You can read more about Polen’s view on why Software-as-a-Service (SaaS) companies may offer the benefits of typical recession-resistant businesses but with potentially more sustainable growth in this recent whitepaper.
If you would like to learn more about the Polen Capital Global Growth Fund, visit the fund’s web page:
POLEN CAPITAL GLOBAL GROWTH FUND
The Polen Capital Global Growth Fund owns shares in SAP. This article was prepared 23 August 2021 with the information we have today, and our view may change. It does not constitute formal advice or professional investment advice. If you wish to trade SAP you should seek financial advice.
Roger Montgomery is the Founder and Chairman of Montgomery Investment Management. Roger has over three decades of experience in funds management and related activities, including equities analysis, equity and derivatives strategy, trading and stockbroking. Prior to establishing Montgomery, Roger held positions at Ord Minnett Jardine Fleming, BT (Australia) Limited and Merrill Lynch.
This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.
