Barron’s writes:
SAP, with annual sales of nearly $10 billion, now accounts for a stunning 54% of the worldwide revenues of the top five players in business software — and that figure looks headed to 70%. SAP has been grabbing market share hand over fist for the past year as two of its key rivals, Oracle and PeopleSoft, prolong their bitter takeover battle. And in dramatic defiance of critics, the company has positioned itself to thrive in a new era of Web-based computing, where corporate workers can exchange data across departmental, physical and geographical barriers.
SAP’s successes have lifted its stock nicely. The company’s New York-traded American depositary receipts have more than doubled in the past two years, to a recent 45. They now trade at about 30 times estimated earnings for 2005, a premium of more than 25% to Oracle, Microsoft and some other competitors. But SAP may well be worth it.
The fact is, Kagermann & Co. soon could hold sway over the corporate-software market to the same degree that Cisco Systems came to rule the Internet- router business in the 1990s. Cisco, after realizing it had become the preferred supplier of the most vital picks and shovels of the Internet gold rush, unleashed a sales and marketing blitz like few others, crushing the competition and becoming the predominant provider of networking gear.
SAP’s greatest opportunity lies beyond Microsoft — in a change taking place in the buying habits of corporate technology chiefs. Many of them no longer have the patience, or lavish budgets, for the costly wares of smaller, more specialized competitors. And they want “fewer necks to choke” when technology malfunctions. A report on tech spending released last week by Goldman Sachs noted that businesses are “still in the upswing part of the trend toward fewer, larger vendors.”
SAP has been able to gain market share by steadily increasing the breadth and depth of its offerings. That’s attracted new customers and given existing ones reasons to order more software. Some companies have shown their allegiance by ripping out their specialized “best of breed” applications and replacing them with comparable SAP offerings.
The other big new product is NetWeaver, which is a stack of software built on an application server-plus, as Kagermann describes it. Application servers allow different applications, or software flavors, to talk to each other via the Internet. While most of SAP’s products in the past were written in proprietary code, NetWeaver uses a more open code that works with software from other companies. For example, PeopleSoft human-resource applications can interact with SAP accounting software. NetWeaver also provides Internet portals for accessing information, and data-warehouse and “business-intelligence” capabilities for analyzing trends.
The stronger sales from transitions to mySAP and installments of NetWeaver should lead to greater application sales to big corporations. At the same time, SAP is making inroads into the wide-open middle tier by launching more affordable solutions for small and mid-sized companies. In all, Goldman’s Sherlund expects SAP to increase its global market share among the top five enterprise vendors to 64% by the end of this year. Other than Cisco in networking, the only tech outfit with that kind of market dominance is Microsoft.
