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Tech stocks - Monday, September 8, 2008

When SAP Sags, Buy It

There's nothing like closing a down week on the market with rising unemployment numbers to really send the traders on Wall St. running for a drink at 4:01pm. While the folks at tech:stocker are ready to crack open a bottle of single malt and start chugging, we can't but wonder what are fellow financial journalists are thinking when they write how higher unemployment claims might affect the housing market. Might? The current housing market is like the Chicago Cubs trying to win the World Series for the last 100 years. You know the collapse is coming, but you just don't know when. Unless there's a miraculous drop in 30-year fixed loans or everyone in the U.S. receives a 25% increase in salary, forget about a housing recovery in the near future. Just because AIG (AIG:NYSE) and Lehman Brothers (LEH:NYSE) had nice increases today doesn't mean that miracles do happen. The Cubs have a won a few games this year but a World Series title will remain out of reach for another season.

Having looked at players in the CRM software, we decided to take a look at a company that is one of the global lords of enterprise software, SAP (SAP:NYSE).

The folks at tech:stocker tend to favor German companies. Seeing BMW continue to sell its overpriced marvels of quality engineering reminds us that German companies are not to be taken lightly. When did Mercedes start to make crappy cars? When they merged with Detroit's Chrysler. When times get tough, you know a German company is going to be competitive.

And tougher times are looming for SAP. As the global economy begins to weaken and the U.S. labor market continues to flounder, we think SAP is going to have a harder time finding new buyers for its enterprise applications. Instead of dropping a few grand on software to maximize the efficiency of employees, bosses can threaten to layoff any lazy sod that won't work a few extra hours every day.

But SAP's second quarter results show anything but tough times for the company. With software revenues up 25% from Q2 2007 and professional service revenues up 21% from the same quarter, SAP appears to be on a roll. And adding marquee customers like Hallmark Cards, H.J. Heinz (HNZ:NYSE), and fellow Germans A.G. Daimler makes a strong statement to potential investors.

Even though we think the lethargic global economy will affect SAP, it may take a little longer than other companies because the sales cycle for their software is several months. As companies with short sales cycles are currently experiencing weaker sales, SAP might start showing lighter balance sheets later this year or in early 2009.

We suspect that SAP's executives are in agreement with us as they recently decreased the capital stock by 1.68%. Even though the share price has been traveling downward, the staff at tech:stocker believes the share price is much closer to the true value. Either the executives have an inflated sense of self-worth about their company, or they know troubled times are ahead and decided to boost the company value instead of buying another company.

The acquisition of Business Objects was a smart purchase. But because SAP doesn't have any experience with large acquisitions, it will be interesting to see if they can manage the process efficiently and keep the costs down. Over the next few years, the merger should reward the company and its shareholders with increased profits.

Overall, we like SAP. We think they can hold their own against Microsoft (MSFT:NASDAQ), Oracle (ORCL:NASDAQ), and Salesforce.com (CRM:NYSE). We would like SAP better from an investment standpoint if the stock dipped below 50, and we think it will. While buying it now would be a safe bet in the long term, buying below 50 is a more profitable bet. Be patient and wait.