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SAP SE (SAP +1%) gaps to 52-week highs today on the backs of another impressive beat-and-raise in Q3. The enterprise software provider continued to extract benefits from an insatiable appetite for AI while realizing further gains from its ongoing cloud transformation over the past four years. Strength in the quarter emerged from new and existing customer wins. Also during the quarter, SAP completed its $1.5 bln tuck-in acquisition of WalkMe, a tech-focused firm specializing in digital adoption platforms.

• As is growing more common for SAP, the company registered mild top and bottom-line upside in Q3, expanding its adjusted EPS by 6% yr/yr and revenue by 9%. Cloud revenue swelled by 25%, resembling growth last quarter and showcasing SAP's ability to continue transitioning legacy clients to the cloud.
• AI is an underlying factor in SAP's steady cloud revenue growth. CEO Christian Klein mentioned that around 30% of the company's cloud order entry in the quarter included deals that involved AI use cases. SAP reached its goal of 100 AI use cases across its suite well ahead of time, buoyed by its Gen AI Hub, which supported a more than tripling of consumption by its partners sequentially. Even better, the consumption by SAP's customers more than quadrupled.
  • There are longer-term margin concerns surrounding AI as customers leverage the technology in scale. SAP does not anticipate risks related to margins in 2025. However, beyond next year, the company remarked that it is speculative how AI activity will affect gross margins as current prices remain in flux. SAP added that it is likely that AI will be margin accretive, but it cannot yet say for certain.
• SAP anticipates sustained momentum going forward, modestly bumping up its cloud and software revenue forecast for FY24. The increased outlook was underpinned by SAP's software suite. The last quarter of each year tends to be the most critical for SAP as it is typically its largest, placing disproportionate weight on Q4 to fulfill full-year financial targets. The final quarter also sets the tone heading into FY25.

Consistency has been SAP's bread-and-butter in 2024, delivering solid quarterly reports capitalizing on an unwavering AI trend. The company's Q3 report was no different, setting Q4 up to be another excellent quarter. However, with shares at all-time highs, SAP trades in priced-to-perfection territory. Minor hiccups, particularly in the upcoming all-important final quarter, could spur considerable selling pressure.