SAP SE Stock Gives Every Indication Of Being Fairly Valued

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May 06, 2021

The stock of SAP SE (NYSE:SAP, 30-year Financials) shows every sign of being fairly valued, according to GuruFocus Value calculation. GuruFocus Value is GuruFocus' estimate of the fair value at which the stock should be traded. It is calculated based on the historical multiples that the stock has traded at, the past business growth and analyst estimates of future business performance. If the price of a stock is significantly above the GF Value Line, it is overvalued and its future return is likely to be poor. On the other hand, if it is significantly below the GF Value Line, its future return will likely be higher. At its current price of $141.08 per share and the market cap of $166.4 billion, SAP SE stock appears to be fairly valued. GF Value for SAP SE is shown in the chart below.

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Because SAP SE is fairly valued, the long-term return of its stock is likely to be close to the rate of its business growth, which averaged 5.7% over the past three years and is estimated to grow 3.08% annually over the next three to five years.

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Companies with poor financial strength offer investors a high risk of permanent capital loss. To avoid permanent capital loss, an investor must do their research and review a company's financial strength before deciding to purchase shares. Both the cash-to-debt ratio and interest coverage of a company are a great way to to understand its financial strength. SAP SE has a cash-to-debt ratio of 0.69, which which ranks worse than 76% of the companies in Software industry. The overall financial strength of SAP SE is 6 out of 10, which indicates that the financial strength of SAP SE is fair. This is the debt and cash of SAP SE over the past years:

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It is less risky to invest in profitable companies, especially those with consistent profitability over long term. A company with high profit margins is usually a safer investment than those with low profit margins. SAP SE has been profitable 10 over the past 10 years. Over the past twelve months, the company had a revenue of $32 billion and earnings of $5.395 a share. Its operating margin is 23.98%, which ranks better than 92% of the companies in Software industry. Overall, the profitability of SAP SE is ranked 9 out of 10, which indicates strong profitability. This is the revenue and net income of SAP SE over the past years:

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Growth is probably the most important factor in the valuation of a company. GuruFocus research has found that growth is closely correlated with the long term stock performance of a company. A faster growing company creates more value for shareholders, especially if the growth is profitable. The 3-year average annual revenue growth of SAP SE is 5.7%, which ranks in the middle range of the companies in Software industry. The 3-year average EBITDA growth rate is 14.5%, which ranks in the middle range of the companies in Software industry.

Another way to look at the profitability of a company is to compare its return on invested capital and the weighted cost of capital. Return on invested capital (ROIC) measures how well a company generates cash flow relative to the capital it has invested in its business. The weighted average cost of capital (WACC) is the rate that a company is expected to pay on average to all its security holders to finance its assets. We want to have the return on invested capital higher than the weighted cost of capital. For the past 12 months, SAP SE's return on invested capital is 8.33, and its cost of capital is 3.72. The historical ROIC vs WACC comparison of SAP SE is shown below:

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In closing, the stock of SAP SE (NYSE:SAP, 30-year Financials) is believed to be fairly valued. The company's financial condition is fair and its profitability is strong. Its growth ranks in the middle range of the companies in Software industry. To learn more about SAP SE stock, you can check out its 30-year Financials here.

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