Berenberg, a German investment bank, has lowered its price target for SAP to €205 from €215, even as the software giant's second-quarter cloud backlog exceeded expectations. The move reflects a mixed assessment: the cloud business is holding up well, but rising costs tied to artificial intelligence are weighing on the outlook.
What the bank said
Berenberg described SAP's quarter as "positive, albeit not clean." The bright spot was the company's current cloud backlog (CCB), a key metric that measures contracted cloud work not yet recognized as revenue. Because CCB came in better than expected, the bank actually raised some of its revenue assumptions and now forecasts SAP's organic CCB exit run-rate to reach 24% to 24.5% by 2026.
However, Berenberg also flagged higher AI-related costs, which prompted the price target cut. The bank's analysts see these expenses as a near-term drag on profitability, even as SAP's core cloud business continues to grow.
Why the cloud backlog matters
For everyday investors, the current cloud backlog is a useful leading indicator. It shows how much future revenue SAP has already locked in from cloud contracts, giving a clearer picture of near-term sales than past results alone. A strong CCB suggests that customers are committing to SAP's cloud services, which is a positive sign for the company's transition from traditional software licenses to subscription-based cloud offerings.
SAP has been pushing hard to move its massive customer base to the cloud, a shift that promises more predictable recurring revenue but also requires heavy upfront investment. The Q2 results suggest that transition is on track, even if the costs are adding up.
The AI cost factor
Berenberg's concern about AI-related costs is part of a broader trend across the tech sector. Many companies are investing heavily in AI capabilities, from data centers to specialized software, hoping to capture future growth. For SAP, these investments include integrating AI features into its enterprise software, such as automated data analysis and predictive tools for business planning.
While these investments could pay off long-term, they compress margins in the short run. Investors should watch for similar cost pressures in upcoming earnings reports from other enterprise software firms.
What it means for investors
For those holding SAP shares, the Berenberg note is a reminder that even strong operational metrics can be offset by rising expenses. The cloud backlog is encouraging, but the AI cost headwind means the stock may not see a quick rebound. The €205 price target implies modest upside from current levels, but it's below the previous target of €215.
Investors should also consider the broader market context. SAP is a bellwether for European tech and enterprise software, so its performance can signal trends for the sector. The company's ability to manage AI costs while maintaining cloud growth will be a key focus in the coming quarters.
For comparison, other major tech firms have also faced similar dynamics. For instance, SLB shares surged over 10% on strong Q2 earnings despite a drop in oil prices, showing that company-specific factors can outweigh broader market headwinds. Similarly, RTX beat earnings across all divisions with a backlog hitting $289 billion, highlighting the importance of backlog metrics in assessing future revenue.
Meanwhile, Morgan Stanley cut Boston Beer's price target due to declining sales of Twisted Tea and Truly, illustrating how analysts adjust targets based on product performance. And Morgan Stanley also cut Tractor Supply's price target after the company dropped its long-term goals, showing that strategic shifts can prompt analyst revisions.
Looking ahead
Investors will be watching SAP's next earnings report for further details on AI spending and cloud backlog growth. The company's ability to balance investment with profitability will be crucial. For now, Berenberg's note suggests that while the cloud story remains intact, the cost side deserves close attention.
