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Investing.com -- Morgan Stanley reiterated its bullish stance on SAP SE (ETR:SAPG), keeping the stock rated Overweight and a Top Pick, citing what it sees as a highly attractive long-term valuation despite near-term macro and technical pressures.
Although short-term revisions are possible due to deal delays, foreign exchange (FX) headwinds and restructuring costs, the structural growth story remains intact, the bank’s analysts said.
“We continue to view SAP as the principal beneficiary from the global ERP upgrade cycle,” a team led by Adam Wood wrote, arguing that “the S/4 migration deadlines and the lack of viable alternatives mean that customers will need to upgrade, albeit with some delays.”
Morgan Stanley now expects SAP’s current cloud backlog growth to slow from 28% in the second quarter to 26% in the third and 25% in the fourth, trimming its forecast for fiscal 2026 (FY26) ex-FX cloud revenue growth to 24% from 25%.
This implies downside risk of 1ppt to consensus estimates, with the bank projecting 2-3% potential cuts to FY26 EPS forecasts. Still, analysts stressed that about 24% ex-FX cloud growth should act as a floor for FY26, with management continuing to express confidence in an acceleration of total revenue growth.
FX is also expected to weigh further, with Morgan Stanley calculating an incremental 50bps headwind since the second quarter.
SAP has called out a “couple hundred” million euro expense in the third quarter linked to workforce adjustments, which analysts believe is not yet fully captured in consensus estimates.
Even so, they believe that SAP’s valuation setup is still compelling. The stock trades at 33 times 2026 adjusted earnings, while Morgan Stanley forecasts a compound annual growth rate (CAGR) of about 17% in EPS between 2026 and 2028.
The note highlighted strong operating leverage, with management guiding for operating expenses to grow at only 80-90% of revenue growth, as well as the potential for share buybacks supported by robust free cash flow.
Analysts also pointed to scope for upside if delayed deals close in the fourth quarter, potentially driving backlog growth to a 26% exit rate.
“We think this continues to screen as highly attractive,” they wrote, emphasizing that with cloud migration still essential for clients—particularly to integrate AI into operations—structural demand remains strong.
Overall, the team thinks that “3Q [is] unlikely to be a significant catalyst, but long-term story [remains] unchanged.”