SAP, Oracle, and IBM, oh my! 'Cloud and AI' drive legacy software firms to record prices.

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There's a trend around legacy software firms and their rising valuations: Companies founded in the age of dinosaurs are going bust, as evidenced by SAP shares above $200 for the first time this week.

Founded in 1972, SAP is currently valued at an all-time high of $234 billion. The Germany-based enterprise software provider was valued at $92 billion two years ago, and $156 billion 12 months ago, meaning its market cap has grown more than 50 percent in the past year alone.

SAP shares rose on June 27, 2024.
Image credit: Ycharts

Market valuations shouldn't be correlated with a company's health, but it's a useful indicator of how the company is doing – whether that's through actual financial performance or whether it's making meaningful moves to change over time. .


SAP AGM: Former SAP Chairman Hasso Plattner (M), CEO Christian Klein (L), and Chairman Pekka Ala-Pietilä
Image credit: Uwe Anspach/picture alliance via Getty Images

CEO Christian Klein has overseen SAP's turnaround since 2020, and has focused on helping customers in the cloud, forging useful partnerships with hyperscalers like Google and Nvidia along the way.

SAP's rapid growth can be partly attributed to this transition from the old-school license model, with its Q1 2024 report reporting a 24% year-over-year increase in cloud revenue, according to a data It expects to grow further in the next 12 months. Because of its “cloud backlog” of revenue in the pipeline. Injecting “business AI” into its cloud suite is also playing a role in the momentum.

Last year there were reports that its on-premises customers were upset with how SAP was pushing its new technology only into its cloud products. But instead of hanging around, SAP is doubling down on its push to get them to the cloud, offering its on-prem customers a discount for the transition — an AI carrot on a cloud stick, if you will.

Investment management company Ave Maria World Equity Fund recently highlighted SAP as one of its top three performers in Q1 2024, noting SAP's shift “from a perpetual license model to a SaaS model” as a major Total Addressable Market (TAM) and will generate higher margins.

And it's these efforts that are driving the fortunes of SAP and similar legacy software companies, according to John David Lovelock, chief forecaster at Gartner.

“There are some tailwinds that are supporting growth — cloud over on-premises systems, priorities for upgrade and expansion needs,” Lovelock told TechCrunch. “But the main impact is just the digital business transformation efforts that started in 2021 are ongoing.”

Hist Oracle

Oracle Chairman and CTO Larry Ellison.
Image credit: Justin Sullivan/Getty Images

And what about Oracle, the American database and cloud infrastructure company founded in 1977? Oracle is worth more than $385 billion as of this week, up 20 percent from a year ago, although the figure was around $400 billion a few weeks ago — an all-time high.

The reasons for this are roughly comparable to SAP: “AI-fueled cloud growth,” the result of a long transition from an on-premises model.

Oracle's recent value growth in a chart.
Image credit: Ycharts

Notably, Oracle's fiscal 2024 Q3 earnings saw the company hit a major milestone with its total cloud revenue — which is SaaS (software-as-a-service) plus IaaS (infrastructure-as-a-service). as-a-service) — surpassing its total license support revenue for the first time.

“We've crossed over,” Oracle CEO Safra Katz said on the earnings call.

In its Q4 earnings, Oracle reported marginal revenue growth of 3% – but that figure rose to 20% for cloud-specific revenue. More is to come, Katz says, projecting double-digit cloud revenue growth in the coming fiscal year. It's helped by partnerships with the likes of Microsoft, Google, and generative AI darling OpenAI, all of which are looking for all the cloud infrastructure they can get — using Oracle's cloud to train OpenAI ChatGPT. intends to do.

“In Q3 and Q4, Oracle signed the largest sales contracts in our history—driven by strong demand for training large AI language models in the Oracle Cloud,” Katz said.

Like SAP, Oracle recently struck a deal with Nvidia to help governments and enterprises run local “AI factories” using Oracle's distributed computing infrastructure.

It's not all rosy, though: One of Oracle's flagship customers, TikTok, is facing a ban in the US, which Oracle warned this week could affect its future revenue.

Big blue eyes returned

IBM CEO and Chairman Arvind Krishna speaks at Wozen Summit 2023, the global Internet conference.
Image credit: Ni Yanqiang, Wang Jianlong, Li Zhenyu/Zhejiang Daily Press Group/VCG via Getty Images

IBM, founded in 1911 as a computing-tabulating-recording company, hit an 11-year high of $180 billion in March, down just 6 percent from an all-time record.

The company's value has since fallen about 14 percent to less than $160 billion, but that's up 30 percent from last year.

IBM's recent value growth in a chart.
Image credit: Ycharts

IBM was once a hardware company, with mainframes and PCs the order of the day, but “Big Blue” branched out into a software and services company, which now makes up most of its revenue. IBM spun off its legacy infrastructure services business as a stand-alone entity called Kyndryl in 2021.

IBM began its cloud journey with BlueCloud in 2007, continuing through the years with the launch of IBM Cloud and the acquisition of milestone megabucks such as Red Hat. At the same time, IBM has also pushed AI front and center, starting with IBM Watson and more recently a number of AI services to support the demand for AI in the enterprise – including Watsonx. , which helps companies train, adapt and deploy AI models. .

“Client demand for AI continues to accelerate, and our book business for Watsonx and generative AI will continue to grow in the third to fourth quarter,” IBM chairman and CEO Arvind Krishna said in its Q4 2023 earnings call in January. It has almost doubled in Mahi.”

IBM's recent financials have been a bit of a mixed bag, with its Q1 2024 numbers showing a small increase in revenue that beat analyst estimates and earnings estimates. On the other hand, its consulting income declined slightly.

However, two months later, analysts remain optimistic about IBM's path, with Goldman Sachs this week giving IBM a “buy” rating on the back of its AI investments and continued focus on infrastructure software.

“We believe IBM is in the middle innings to diversify its portfolio away from a legacy-focused portfolio into a broader array of modern application and infrastructure software and services,” Goldman Sachs analyst James Schneider said. Is.”

It's too early to say how that sentiment will play out, but as far as Wall Street is concerned IBM's AI investment is paying dividends.

Heritage building

SAP, Oracle, and IBM aren't the only legacy software companies enjoying a productive time. Intuit, a 41-year-old financial software company, hit a record high of $187 billion last month, just a fraction of its pandemic-era high of $196 billion. Like others, Intuit is investing heavily in AI as part of its push to stay relevant, and it's the first thing it talks about on its earnings calls.

And Adobe, founded in 1982, is also doing well, with its value up 8% year-over-year to $236 billion — Adobe posted record Q1 and Q2 revenue with AI and the cloud. It is important for this development.

Microsoft is the world's most valuable company, a $3.3 trillion company whose shares have risen 33 percent in the past year. A decade in the hot seat, Satya Nadella has transformed Microsoft into a cloud-first, AI-first colossal company that lost out on the smartphone gold rush due to earlier mistakes.

Microsoft turns 50 next year, and staying relevant after so many industry, technological, political, and management changes isn't easy. But Microsoft hasn't just stayed relevant — its revenue, profits, and nearly every other metric continue to grow, thanks to its investments in the cloud and, more recently, creative AI.

While these companies are certainly benefiting from adopting new trends, there are other factors at play – notably, investors don't have many places to put their money to bet on new technology. .

Ray Wang, founder and principal analyst at Constellation Research, believes that the lack of competition in certain markets has helped drive investors to larger companies.

“There is minimal competition because we are in oligopolies and duopolies,” Wang told TechCrunch. “We used to have hundreds of software companies, but decades of mergers and acquisitions have reduced the options to a few companies in every geography, category, market size, and industry.”

Wang also pointed to the impact of the stagnant IPO market as well as the private equity sector, as legacy technology companies are performing well.

“Covid killed the IPO market — we don't have the startups of the past that could be the next Oracle, SAP, or Salesforce. Despite the number of software companies starting up, the pipeline is bad — they scale,” Wang said. But have not arrived.”[And] Too many acquisitions by PE firms have destroyed the spirit of entrepreneurship and [have] Turned these companies into financial robots.

There are many ways to slice and dice it all, but well-established software firms are ultimately better positioned to thrive when game-changing technologies such as AI come along, due to the fact that they has a strong market presence and stable customer base.

Their respective cloud transitions are also a big part of the narrative, which neatly aligns with the rise of AI, which is heavily reliant on the cloud.

They also have significant resources at their disposal, with strategic acquisitions contributing to their push to stay relevant: IBM is bolstering its hybrid cloud ambitions with its recent $6.4 billion bid for HashiCorp; While SAP has revealed plans to pay $1.5 billion for AI- Infused Digital Adoption Platform WalkMe.

AI may have minimal impact on companies' bottom lines today, but as far as Wall Street is concerned, it's important: Alphabet, Amazon and Microsoft have hit record highs of late, and AI has is a large part. . Apple shares also hit an all-time high on the back of its recent AI announcements, although “Apple Intelligence” is not yet available.

The AI ​​tide may be lifting all boats right now, but Gartner's famous “hype cycle” predicts that interest in new technologies will fade as all early experiments and implementations fail to live up to their promise. are That could, according to Lovelock, mean that many of these billion-dollar AI startups might have something to worry about.

“It's easy to get lost in new and emerging software markets,” Lovelock said. “It's also hard to compete for attention when new AI companies are boasting billions of dollars in revenue within a few years of launch. However, traditional software markets are expected to exceed $1 trillion in combined annual revenue in 2024 – Legacy Software Ware sales are booming, and AI's strong growth has obscured that reality for many.”

Businesses that have been around for decades are better positioned to thrive because of their existing footprint. We may be in an AI bubble, but when mainstream adoption truly begins, the SAPs, Oracles, and IBMs of the world will be in a better position to jump on board.

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