SAP

The software powerhouse from Walldorf

For 3 months now, I've turned my great passion into my job. What I used to do on the side, I can now do full-time. I get to analyze stocks, write articles about them, maintain spreadsheets, and work with motivated clients. I've turned my hobby into my job and I'm very grateful for it.

Before I took this step, though, I worked in logistics for over 8 years and dealt intensively with SAP there. I completed all the relevant SAP training courses and over the years became a power user with admin rights. This is where my motto comes in again: "Go through the world with your eyes open and you'll find great investment opportunities everywhere!" That's why today I'd like to introduce the largest DAX company (by market capitalization).

The history and business model of SAP SE

Hasso Plattner was born on January 21, 1944. His father worked as an eye doctor and his mother was a teacher at a school in Berlin-Grünwald. After the family moved to Konstanz, Hasso graduated from high school in 1963. He then wanted to study physics at the Technical University of Karlsruhe. However, a physics student convinced him to switch to communications engineering. 5 years later, as a freshly minted engineer, he went looking for a suitable employer. In the end he had 2 job offers on the table - from Siemens and IBM. He ultimately chose IBM because they paid him 200 marks more per month - so from then on, Hasso worked for the computer company at its Mannheim location. One day a customer came and asked for a company-wide software solution for its specific work processes. Hasso and 4 other colleagues (Dietmar Hopp, Claus Wellenreuther, Hans-Werner Hector, and Klaus Tschira) tinkered with a suitable solution for a long time, until IBM informed them that the customer had awarded the contract elsewhere. Convinced of their idea, the five IT specialists decided in 1972 to leave IBM and strike out together. Systemanalyse und Programmentwicklung GbR was born.

The 5 young entrepreneurs didn't want to store data on punch cards and then feed it into a system in batches, as was common back then. Instead, they bet on the revolutionary technology of entering data on screen via a keyboard. They quickly won their first customer, the nylon fiber plant of Imperial Chemical Industries (ICI). They were to develop a software solution for payroll and accounting. Instead of writing the program in their own office, they spent most of their time working directly in their customer's data centers. The software was designed so that, after successful implementation, it could also be offered to other interested parties. The SAP R/1 module (R stands for "Realtime") was so popular that in its very first fiscal year the company booked around 640,000 marks in revenue and was able to hire its first employees.

The company continuously developed new features and gradually expanded its customer base. In 1977 came the restructuring into "Systeme, Anwendungen, Produkte in der Datenverarbeitung GmbH" (Systems, Applications, Products in Data Processing) - SAP for short. Shortly afterwards, the company moved to nearby Walldorf (near Heidelberg). There it set up its first data center of its own. Always keeping an ear to the customer, it programmed further SAP modules for purchasing, materials planning, inventory management, as well as financial accounting and controlling. What was special about the SAP modules was that they could be combined with one another. So customers could capture and process all their different tasks centrally. By 1982, the company already counted over 250 businesses in Germany among its customers. At that time, SAP generated annual revenue of 24 million marks with only around 100 employees. Shortly afterwards, it expanded into neighboring European countries - Austria, England, France, Spain, and the Netherlands. There was no stopping SAP's growth, and in 1988 it finally went public. Today SAP is the largest and most important tech company in Europe and one of the largest in the world. It now serves over 440,000 customers in more than 180 countries. Recently, SAP has invested massively in the high-margin cloud business. So the software powerhouse from Baden-Württemberg can look forward to a promising future.

Will SAP be able to keep making profits in the future?

Hmm, if the corona crisis is now followed by a devastating economic crisis and all 440,000 business customers go bankrupt, then SAP probably has a serious problem. Okay, joking aside - a scenario like that is of course nonsense. You can see really well how SAP deals with crises by looking at 2008/2009. Revenue first dropped by around 10 percent, but rose again by 20 percent the following year. Especially in a phase of economic weakness like this, SAP will only lose the customers who become insolvent. Switching systems to one of SAP's competitors involves an extreme amount of work and extremely high costs. Time and money that nobody likes to spend right now. Especially since customers who have already fully switched to SAP and gotten all their processes running on SAP are hardly going to switch.

The software company has invested a lot of money in expanding its cloud business. It wants to offer its customers internet-based process solutions so they don't have to maintain their own servers or even their own network administrator. In return, customers pay a monthly fee. Conversely, that means less stress for customers and predictable revenue for SAP. For this purpose, in 2018 it also bought the cloud specialist Qualtrics for around €8 billion.

And how's the dividend doing?

Since the IPO in 1988, shareholders have received a share of the profits in the form of dividends. The dividend hasn't been cut for 26 years. However, in some years the dividend couldn't be raised. For example, from 2008 to 2010 the dividend was "frozen." Over 10 years, the dividend growth rate is an impressive 12.6 percent. That significantly enhances the relatively low dividend yield of 1.4 percent. For the payout ratio, the company aims for the healthy mark of 40 percent.

Conclusion

Over the years, the software company SAP has developed into an indispensable partner for countless business customers in the most diverse industries. With its technologies, it's always keeping up with the times and is therefore very well equipped for the future. Investors who'd like to have a German tech stock in their portfolio can buy here with peace of mind.