German technology giant SAP has upset investors by scrapping its medium-term profitability targets in favour of a strong pivot towards cloud computing. In an updated business outlook, the company admitted that it would take longer than initially expected to recover from the COVID-19 pandemic.
Referencing a previous business outlook issued earlier in the year, SAP noted that the reintroduction of restrictions in many countries means that predictions of a robust recovery may have been overly optimistic.
The pandemic has also pushed businesses to embrace digital technologies at a rapid pace, with remote working and virtual meetings suddenly becoming commonplace. Bolstering SAP’s cloud computing business is a reflection of these shifting workplace demands.
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Cloudy skies ahead
“The acceleration of customers’ move to the cloud and subsequent business transformations drive the new ambition’s cloud revenue target of more than €22 billion by 2025,” SAP explained as part of the company’s updated mid-term ambitions. “SAP expects this to negatively impact the 2023 operating margin by approximately 4 to 5 percentage points relative to the previous mid-term ambition.”
However, SAP’s renewed emphasis on the cloud means that profitability will be hard to come by, initially at least. The company fell in value by 20% on the Frankfurt Stock Exchange, its biggest single-day drop in 24 years. Cloud revenue is now predicted to triple by 2025, but overall profits are expected to be reduced over the next three years.
There is also a concern that SAP will struggle to dominate the cloud market. Despite its experience and scale, the German firm may find that customers prefer more agile, innovative vendors. The cloud market is extremely competitive and SAP will need to prove that it can put a disappointing 2020 behind it, a year that saw the company struggle to replace its long-time CEO, Bill McDermott.
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