SAP’s Cloud Margins Hit 30% But the Market Demands More

The German software giant has staged a dramatic turnaround in a matter of days, but the recovery is far from complete. After shedding nearly 27% of its value since the start of the year and tumbling from a 52-week high above €271, SAP’s shares finally caught a bid on Friday, climbing roughly 5% to €147.64. The catalyst was a first-quarter earnings report that, while not flawless, offered enough evidence that the company’s cloud transformation remains on track.

Profitability Surprises to the Upside

The headline numbers tell a story of operational discipline paying off. Revenue came in at €9.56 billion, while earnings per share hit €1.66 — both figures that beat analyst expectations. The real standout, however, was the margin performance. Operating margin jumped from 25.9% to 28.7% year-over-year, a clear sign that the cost-cutting initiatives rolled out over the past year are beginning to bite.

Deutsche Bank analysts described the quarter as a “relief report,” and the market largely agreed. Bernstein Research lifted its price target to €276, implying substantial upside from current levels. The cloud order backlog, a key forward-looking metric, reached €21.9 billion, up 25% on a currency-adjusted basis. Cloud revenue itself grew 27% in constant currency, while the cloud ERP suite accelerated to 30% growth.

The Cloud Story Has a Catch

Yet the picture is more nuanced than the Friday rally suggests. Before the earnings release, SAP’s stock had fallen 5.6%, and it dropped another 6% in after-hours trading. The culprit was a revenue miss: total sales of $11.04 billion fell short of the $11.17 billion consensus. Earnings per share of $1.92 barely matched expectations.

The management also tweaked its full-year guidance in a way that caught some investors off guard. Rather than forecasting an acceleration in total revenue growth, the company now expects a similar pace to 2025. That subtle shift in language suggests that while the cloud transition is delivering, the broader top-line picture remains mixed.

HSBC upgraded the stock from Hold to Buy, while Barclays cut its price target from $283 to $256 but maintained an overweight rating. The divergence among analysts reflects the tension between the strong cloud metrics and the softer overall revenue outlook.

Should investors sell immediately? Or is it worth buying SAP?

A €10 Billion Share Buyback and a Dividend Proposal

Alongside the earnings, SAP’s management has been deploying capital aggressively to support the stock. Through the end of April, the company repurchased roughly 16 million of its own shares, worth about €2.6 billion. The current buyback program runs through the end of 2027 and has a maximum volume of €10 billion.

For the upcoming annual general meeting on May 5, the board has proposed a dividend of €2.50 per share, maintaining the company’s stable payout policy after a strong prior year. The combination of buybacks and dividends signals confidence in cash generation, even as the company invests heavily in its cloud and AI infrastructure.

The AI Monetization Puzzle

Not everyone is convinced the rally is sustainable. The DZ Bank continues to recommend selling the stock, citing intense competition in the AI solutions space. The concern is that SAP’s AI strategy, while ambitious, faces an uncertain path to profitability.

The company is preparing a fundamental shift in how it charges for AI services. Starting in July, SAP plans to introduce consumption-based pricing models for its AI offerings, moving away from the traditional subscription structures that have long defined the business. This marks a strategic departure, and the details will be crucial.

The SAP Sapphire conference, beginning May 11, will be the next major test. Management is expected to provide concrete insights into the new Business AI tools and explain how the pricing models will support growth in the second half of the year. For now, the market is giving SAP the benefit of the doubt, but the proof will need to come in the form of accelerating revenue — not just improving margins.