SAP stock rises 7% on cloud beat but AI strategy concerns linger

SAP SE reported first-quarter cloud revenue of €5.96 billion, narrowly beating analyst estimates and sending its shares up, but failed to quell persistent market doubts over its costly and uncertain transition toward artificial intelligence.

"With the move to a consumption-based billing model, it's a bit of an unknown," JPMorgan analysts including Toby Ogg wrote in a note before the report, highlighting the challenge of a transition far less understood than the previous shift to cloud subscriptions.

The German software giant's cloud revenue edged out the €5.9 billion average analyst forecast compiled by Bloomberg. However, its current cloud backlog—a key indicator of future contract growth—grew 25% at constant currency, merely matching the previous quarter's rate, which CEO Christian Klein had previously described as a potentially "disappointing" outcome. SAP's American Depositary Receipts rose about 7% in post-market trading, while the stock in Frankfurt closed Thursday at €140.70, down 32% year-to-date.

The core issue for investors is whether emerging AI firms will erode SAP's revenue base by automating enterprise processes, making traditional software subscriptions obsolete. Klein is staking his leadership on a second major pivot, this time from subscriptions to AI-based consumption billing, a move that could determine SAP's relevance against rivals like Oracle and Salesforce in the new AI-driven market.

Cloud Growth Provides Cover for Risky AI Pivot

For now, the stability of SAP's core cloud business is providing financial cover for the strategic overhaul. The company maintained its full-year forecast for cloud revenue of between €25.5 billion and €26.2 billion. This resilience, however, stands in stark contrast to the stock's performance, with shares having lost nearly a third of their value this year as the market weighs the risks of the AI transition. The post-earnings share price increase appears more a technical rebound from a low base than a fundamental endorsement of the new strategy.

From Subscription to Consumption

This is the second major business model transformation Klein has led, following the 2020 pivot from on-premise software licenses to cloud subscriptions—a move that also triggered a significant, albeit temporary, drop in the stock price that took about two years to recover from. The current shift may be even more complex. Klein has warned of "short-term pain" as the company moves away from predictable subscription fees toward a consumption-based model tied to AI usage, a strategy that has already drawn criticism from some customers and partners regarding early AI tools.

The challenge for SAP is to convince customers and investors that its integrated AI functions are valuable enough to drive consumption, especially as competitors from established players like Microsoft to nimble AI-native startups intensify. The 7% after-hours jump in ADRs suggests some investors are willing to give SAP the benefit of the doubt for its slight revenue beat, but the flat backlog growth and 32% year-to-date decline show that the company has yet to win the market's confidence in its long-term AI vision.

This article is for informational purposes only and does not constitute investment advice.