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SAP: Cloud Provides Massive Upside Potential

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Summary

SAP is experiencing growing pains in its cloud segment.

Massive ramp-up costs have decreased overall margins.

Cloud segment is currently not generating any free cash flow.

When volumes start to increase, the cloud segment’s operating cash flow should start to increase at a rapid pace.

SAP (SAP) is currently investing heavily in its cloud business and this has severely hurt its margins and cash flow. The cloud business does not currently seem to generate any free cash flow but this could change in a few years if the company manages to meet and exceed its volume targets. Considering how positive SAP’s management is about its future, investors can expect a significant increase in free cash flow margins and hence dividends after a few years.

A Closer Look at SAP’s Cloud Segment Profitability

In order to see how profitable SAP’s cloud business has been from cash flow point of view, we need to compare the latest cash flow figures to figures before the cloud-era. Even though SAP has been investing in its cloud business for many years, it was not until 2014 when the management decided to put much more focus on this segment.

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Article Credit: Seeking Alpha

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