SAP, and Oracle, and IBM, oh my! ‘Cloud and AI’ push legacy software firms to record valuations

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There’s a trend about traditional software companies and their rising valuations: Companies founded in the time of the dinosaurs are moving faster, as evidenced this week when SAP shares surpassed $200 for the first time.

Founded in 1972, SAP’s valuation is currently at an all-time high of $234 billion. The Germany-based enterprise software provider was valued at $92 billion two years ago, and $156 billion 12 months ago, meaning its market capitalisation has risen by more than 50% in the past year alone.

SAP shares to rise on June 27, 2024
SAP shares surged on June 27, 2024.
Image Credit: YCharts

Market valuation shouldn’t be equated with a company’s health, but it is a useful indicator of how a company is performing – whether through actual financial performance or through meaningful steps it takes to change over time.

Old SAP

Hasso Plattner (m), former president of SAP, CEO Christian Klein (l), and chairman Pekka Ala-Pietilä
SAP AGM: Former SAP President Hasso Plattner (M), CEO Christian Klein (L), and Chairman Pekka Ala-Pietilä
Image Credit: Uwe Anspach/Picture Alliance via Getty Images

CEO Christian Klein has overseen SAP’s turnaround since 2020, focusing on helping customers transition to the cloud, as well as fruitful partnerships with hyperscalers such as Google and Nvidia.

SAP’s rapid growth may be partly due to this transition from old-school licensing models, with its Q1 2024 report reporting year-over-year cloud revenue growth of 24%, a figure which the company said it expects to grow further over the next 12 months due to its “cloud backlog” revenue in the pipeline. The addition of “business AI” to its cloud suite is also playing a role in this trajectory.

Last year, reports surfaced that SAP’s on-premises customers had become unhappy with how SAP was only incorporating its new technology into its cloud products. But, rather than appease them, SAP has redoubled its efforts to bring them to the cloud, offering its on-premises customers discounts to make the switch – call it the AI ​​carrot on a cloud stick, if you like.

Investment management company Ave Maria World Equity Fund recently highlighted SAP as one of its top three performers in Q1 2024, saying SAP’s “transformation from a perpetual license model to a SaaS model” will create a larger total addressable market (TAM) and higher margins.

According to John-David Lovelock, chief forecaster at Gartner, such efforts are driving the fortunes of SAP and other similar software companies.

“There are some tailwinds driving growth — a preference for cloud over on-premises systems, upgrade and expansion needs,” Lovelock told TechCrunch. “But the primary impact is simply that digital business transformation efforts that began in 2021 are still ongoing.”

Hist-Oracle

Larry Ellison, Chairman and CTO of Oracle
Oracle Chairman and CTO Larry Ellison.
Image Credit: Justin Sullivan/Getty Images

And what about Oracle, the American database and cloud infrastructure company founded in 1977? As of this week, Oracle’s valuation is over $385 billion, up 20% over the past year, although the figure was nearly $400 billion a few weeks ago – the highest valuation ever.

The reasons for this are broadly similar to those for SAP: “AI-driven cloud growth”, which is the result of a long transition away from an on-premises model.

Oracle's recent valuation increase in charts
Oracle’s recent valuation increase in the chart.
Image Credit: YCharts

Notably, Oracle’s fiscal 2024 third-quarter earnings saw the company cross a significant milestone, with its total cloud revenue — which is SaaS (software-as-a-service) plus IaaS (infrastructure-as-a-service) — surpassing its total license support revenue for the first time.

“We exceeded that target,” Oracle CEO Safra Catz said on the earnings call.

In its fourth quarter earnings, Oracle reported modest revenue growth of 3% – but that figure rose to 20% for cloud-specific revenue. And there’s more to come, says Katz, forecasting double-digit cloud revenue growth in the coming fiscal year. This is aided by partnerships with companies like Microsoft, Google and generative AI darling OpenAI, all of which are looking to cloud infrastructure – OpenAI plans to use Oracle’s cloud to train ChatGPT.

“In the third and fourth quarters, Oracle signed the largest sales contracts in our history – driven by strong demand for training AI large language models in the Oracle Cloud,” Catz said.

Like SAP, Oracle also recently signed a deal with Nvidia to help governments and enterprises run “AI factories” locally using Oracle’s distributed computing infrastructure.

It’s not all rosy, though: one of Oracle’s major customers, TikTok, is facing a ban in the US, with Oracle warning this week that this could impact its future revenue.

The big blue eyes are back

IBM CEO and Chairman Arvind Krishna speaking at the 2023 World Internet Conference Wuzhen Summit
IBM CEO and Chairman Arvind Krishna speaking at the 2023 World Internet Conference Wuzhen Summit.
Image Credit: Nie Yanqiang, Wang Jianlong, Li Zhenyu/Zhejiang Daily Press Group/VCG via Getty Images

IBM, founded in 1911 as the Computing-Tabulating-Recording Company, reported its revenue in March at an 11-year high of $180 billion, just 6% below its all-time record.

The company’s valuation has fallen about 14% since then to below $160 billion, but it is still up 30% over the past year.

IBM's recent valuation growth in charts
IBM’s recent valuation growth chart.
Image Credit: YCharts

IBM was once a hardware company, dominated by mainframes and PCs, but “Big Blue” became a software and services company, which now makes up the majority of its revenue. IBM spun off its old infrastructure services business as a stand-alone unit called Kindrill in 2021.

IBM began its cloud journey in 2007 with Blue Cloud, which continued over the years with the launch of IBM Cloud and major acquisitions such as Red Hat. At the same time, IBM has also pursued AI, starting with IBM Watson and more recently launching a range of AI services to support the demand for AI in the enterprise – including the launch of WatsonX, which helps companies train, tweak, and deploy AI models.

“Client demand for AI is growing, and our business for WatsonX and generative AI nearly doubled from the third to the fourth quarter,” IBM Chairman and CEO Arvind Krishna said on its fourth quarter 2023 earnings in January.

IBM’s recent financial results have been somewhat mixed, with its Q1 2024 figures showing modest revenue growth that is below analysts’ estimates and earnings that are above estimates. On the other hand, its consulting revenue has declined slightly.

However, two months later, analysts are optimistic about IBM’s path, with Goldman Sachs this week giving IBM a “buy” rating based on its AI investments and continued focus on infrastructure software.

“We believe IBM is in the mid-stages of transforming its portfolio from a legacy-focused portfolio to a broader range of modernized application and infrastructure software and services,” said Goldman Sachs analyst James Schneider.

It’s too early to say how long this sentiment will continue, but as far as Wall Street is concerned, IBM’s AI investments are paying off.

Legacy Creation

SAP, Oracle and IBM aren’t the only legacy software companies enjoying the good times. Intuit, a 41-year-old financial software company, hit a stunning $187 billion last month, just shy of its pandemic-era high of $196 billion. Like others, Intuit is investing heavily in AI in its effort to stay relevant, and it’s the first thing it talks about in its earnings calls.

And Adobe, founded in 1982, is also doing quite well, with its valuation rising 8% year-over-year to $236 billion – Adobe reported record revenues in the first and second quarters, with AI and cloud being cited as key to this growth.

Microsoft is the world’s most valuable company, worth $3.3 trillion, and its shares have jumped 33% in the past year. After a decade in the hot seat, Satya Nadella has transformed Microsoft into a cloud-first, AI-first giant that missed out on the smartphone gold rush because of earlier mistakes.

Microsoft will turn 50 next year, and it’s not easy to stay relevant after so many industrial, technological, political and managerial changes. But Microsoft hasn’t just stayed relevant – its revenue, profit and nearly every other metric continue to surge, thanks to its investments in the cloud and, more recently, generative AI.

While these companies are certainly benefiting from embracing new trends, there are other factors involved as well — most notably, investors simply don’t have many places to put their money when betting on new technology.

Ray Wang, founder and principal analyst at Constellation Research, believes the lack of competition in some markets has helped attract investors to larger companies.

“We have very little competition because we are in an oligopoly and duopoly,” Wang told TechCrunch. “We used to have hundreds of software companies, but decades of mergers and acquisitions have narrowed the options to just a few companies in every geography, category, market size, and industry.”

Wang also pointed to a stable IPO market, as well as the influence of the private equity sector, as reasons why traditional technology companies are doing well.

“COVID has decimated the IPO market — we don’t have the startups of the past that can become the next Oracle, SAP or Salesforce. Despite the number of software companies that have started, the pipe has been bad — they haven’t been able to reach scale,” Wang said. “(And) many acquisitions by PE firms have destroyed the entrepreneurial spirit and turned these companies into financial robots.”

There are many ways to analyze all of this, but when a game-changing technology like AI comes along, well-established software companies are ultimately in a better position because they have a market presence and a stable customer base.

Their respective cloud transformations are also a big part of the narrative, which ties in nicely with the rise of AI, which is heavily reliant on the cloud.

They also have ample resources, and strategic acquisitions are playing a key role in maintaining their relevance: IBM recently bolstered its hybrid cloud ambitions with a $6.4 billion bid for HashiCorp, while SAP revealed plans to pay $1.5 billion for WalkMe, an AI-enabled digital adoption platform.

AI may have little impact on companies’ profits today, but it’s a must-have on Wall Street: Alphabet, Amazon, and Microsoft all hit record highs recently, and AI is a big part of that. Apple’s stock also recently hit an all-time high after AI announcements, even though “Apple Intelligence” isn’t available yet.

The wave of AI is lifting all boats at the moment, but Gartner’s famous “hype cycle” predicts that interest in the new technology is going to wane as all the early experiments and implementations fail to deliver on their promise – this is what’s called the “trough of disillusionment”. According to Lovelock, this could be coming, which means many of those billion-dollar generative AI startups may have something to worry about.

“It’s easy to get lost in the sea of ​​new and emerging software markets,” Lovelock said. “It’s also hard to get noticed when new AI companies are generating several billion dollars in revenue within just a few years of launch. However, the combined annual revenue of traditional software markets is set to exceed $1 trillion in 2024 – legacy software sales are growing strongly, and AI’s strong growth has obscured this fact for many.”

Businesses that have been around for decades are better positioned to thrive because of their current position. We may be in an AI bubble, but when mainstream adoption happens, the SAPs, Oracles, and IBMs of the world will be better positioned to jump on it.

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