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The Lupo-Kioutas Enterprise Business Model© (patent pending) and SAP Company Report Card.

As with all of our company specific equity analysis, we utilize the Lupo-Kioutas Enterprise Business Model© to determine a company's core profit engine that drives actual earnings and revenue.  Below is a brief report card from  the model as it pertains to SAP.  For more on the enterprise business model click here.

Lupo-Kioutas Enterprise Business Model Report Card© for SAP

Fundamental Analysis:

Aged and Matured Industry...Where's the Growth?

SAP, like Microsoft and Oracle are the AARP citizens of the capital markets in technology similar to the old smoke stack industries.  The growth through acquisition business driver options are as follows for SAP and other large software vendors:

1.  Software is very mature and the ERP space contains shrinking growth opportunities.  It makes sense for SAP to look for growth via an industry type acquisition such as Telcordia or other industry candidates. 
 

2.  Software vendors need a customer base to sell into which was Oracle's strategy in the purchase of PeopleSoft.  The numbers of ERP customers are clearly shrinking, so this option is less than attractive.
 

3.  SAP and other software vendors need to grow an industry base in addition to a customer base as the software market continues to mature.

Brief Analysis:

It is worth noting that SAP's strength is their industry based subject matter experts imbedded in the ERP software, such as accounting, CRM, and SCM. Many customers choose SAP primarily because best practices are often already 'coded' in the system, thus little decision support is required from the lines of business that adopt the software on an enterprise level.  This obviously has its drawbacks to specialized business models, but it is also a strength in commodity type business models such as retail, government, finance, and of course, Telco.

Whereas Oracle and even IBM have targeted customer bases, SAP is now entering into an industry base which makes sense if further company growth is to be achieved.  SAP needs to continue to pursue acquisitions which have the end customers and the subject matter experts that SAP could exploit with minimal risk to achieve future growth and market share. There simply are not that many intelligent options out there to sustain growth as the software refresh cycle grows longer and longer.

We went on record early with the Oracle vs. PeopleSoft acquisition stating that it was a done deal despite the legal rumblings and price quibblings. The business driver is the same here...how else will large enterprise software companies grow? In 5 years what will be the compelling business reason for any customer to upgrade or will 'open source' make its way into the enterprise by then? The only protection large ERP software firms currently have is the maintenance and service/support agreements that expire after so many years, similar to the auto industry, but the difference here is that software does not really break and it won't take too long for customers to figure this out. 

You are currently viewing Page 2 of Financial Trader Research's  SAP 'Mini-Re'.

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