There's a trend when it comes to established software companies and their skyrocketing valuations: Companies founded in the age of the dinosaurs are booming, as evidenced by SAP's stock price surpassing $200 for the first time this week.
Founded in 1972, SAP is now 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 increased by more than 50% in the past year alone.
SAP shares surged on June 27, 2024. Image courtesy of Ycharts
While market valuation shouldn't be confused with a company's health, it is a useful indicator of how a company is doing, whether through actual financial performance or through meaningful moves to change with the times.
Old SAP
SAP Shareholders' Meeting: Former SAP Chairman Hasso Plattner (centre), CEO Christian Klein (left) and Chairman Pekka Ara Pietila. Image credit: Uwe Anspach/picture alliance via Getty Images
CEO Christian Klein has overseen a turnaround at SAP since 2020, focusing on helping customers move to the cloud, forging fruitful partnerships with hyperscalers such as Google and Nvidia along the way.
SAP's rapid growth can be attributed in part to its move away from outdated licensing models. Its Q1 2024 report revealed a 24% year-over-year increase in cloud revenue, a figure the company expects to grow further over the next 12 months due to “cloud backlog” revenue in the pipeline. The introduction of “business AI” across its cloud suite has also contributed to this trajectory.
Last year, reports surfaced that on-premise customers were frustrated that SAP was only introducing new technologies to its cloud offerings. Rather than pander, SAP is encouraging on-premise customers to move to the cloud by offering migration discounts, further encouraging them to move to the cloud. In other words, it's like putting AI as a carrot on a cloud stick.
Investment management firm Ave Maria World Equity Fund recently named SAP one of the top three performers for the first quarter of 2024, noting that SAP's “transition from a perpetual license model to a SaaS model” will expand its total addressable market (TAM) and boost profit margins.
It's these efforts that are determining the fate of SAP and similar legacy software companies, according to Gartner chief forecaster John David Lovelock.
“There are several tailwinds driving growth, including the preference for cloud over on-premise systems, upgrades and expansion requirements,” Lovelock told TechCrunch, “but the primary impact is just the continuation of the digital business transformation efforts that began in 2021.”
Hist Oracle
Oracle Chairman and Chief Technology Officer Larry Ellison. Image by Justin Sullivan/Getty Images
So what about Oracle, the American database and cloud infrastructure company founded in 1977? Oracle was valued at more than $385 billion as of this week, up 20% from last year, but that figure was nearly $400 billion a few weeks ago, far higher than its previous valuation.
The reasons are much the same as for SAP: “cloud growth with AI” and the result of a long-term transition away from on-premise models.
A graphical representation of Oracle's recent valuation growth. Image courtesy of Ycharts
Notably, Oracle's third quarter fiscal 2024 revenue saw the company reach a significant milestone when its total cloud revenue (combined SaaS (Software as a Service) and IaaS (Infrastructure as a Service) revenue) exceeded its total license support revenue for the first time.
“We've pushed the envelope,” Oracle CEO Safra Catz said on an earnings conference call.
In its fourth-quarter earnings report, Oracle reported modest revenue growth of 3 percent, but that figure rose to 20 percent for cloud-specific revenue. And Catz said there's more growth to come, with the company predicting double-digit growth in cloud revenue in the next fiscal year. This is being driven by partnerships with companies like Microsoft, Google, and generative AI darling OpenAI, which is clamoring for all the cloud infrastructure it can get, and OpenAI plans to use Oracle's cloud to train ChatGPT.
“In the third and fourth quarters, Oracle closed the largest sales deal in our history, fueled by massive demand for training AI large-scale language models on Oracle Cloud,” Catz said.
Like SAP, Oracle recently signed a deal with Nvidia to help governments and businesses run “AI factories” locally using Oracle's distributed computing infrastructure.
But the outlook isn't all rosy: One of Oracle's major clients, TikTok, is facing a ban in the US, and Oracle warned this week that this could affect future revenue.
Big Blue Eyes is back
IBM CEO and Chairman Arvind Krishna speaking at the World Internet Conference Wuzhen Summit 2023. Image credit: Ni Yanqiang, Wang Jianlong, Li Zhenyu/Zhejiang Daily Press Group/VCG via Getty Images
IBM, founded in 1911 as the Computing-Tabulating-Recording Company, hit an 11-year high of $180 billion in March, just 6% shy of its all-time high.
The company's valuation has fallen about 14% since then to below $160 billion, but it's still up 30% from last year.
A graphical representation of IBM's recent valuation growth. Image credit: Ycharts
While IBM was once a hardware company dominated by mainframes and PCs, “Big Blue” has transitioned to a software and services company, which now accounts for the majority of its revenue. IBM spun off its legacy infrastructure services business as a standalone company, Kyndryl, in 2021.
IBM began its cloud journey in 2007 with Blue Cloud and has continued it over the years with the launch of IBM Cloud and landmark mega-acquisitions such as Red Hat. At the same time, IBM has brought AI to the forefront, starting with IBM Watson, and more recently rolled out a number of AI services to meet the AI demands of the enterprise, including the launch of Watsonx, which helps businesses train, tune and deploy AI models.
“Client demand for AI is accelerating, with Watsonix and Generative AI volumes nearly doubling from the third quarter to the fourth quarter,” IBM Chairman and CEO Arvind Krishna said during the company's fourth-quarter 2023 earnings call in January.
IBM's recent financials have been a mixed bag, with first-quarter 2024 numbers showing modest revenue growth below analyst expectations and profits that beat expectations, while consulting revenue declined slightly.
But two months later, analysts are more bullish on IBM's path, with Goldman Sachs giving the company a “buy” rating this week on the back of IBM's AI investments and continued focus on infrastructure software.
“We see IBM as being in the middle of transforming its portfolio from a legacy-heavy one to a suite of modernized application and infrastructure software and a broader range of services,” Goldman Sachs analyst James Schneider said.
It's too early to say how that sentiment will change, but as far as Wall Street is concerned, IBM's AI investments are paying off.
Legacy Construction
SAP, Oracle and IBM aren't the only companies having a good time: Intuit, a 41-year-old financial software company, hit a record high of $187 billion last month, just shy of its pandemic-era high of $196 billion. Like other companies, Intuit is investing heavily in AI as part of its efforts to stay relevant, and it's the first thing the company talks about on its earnings calls.
Adobe, founded in 1982, is also doing well, with its valuation rising 8% year over year to $236 billion. The company posted record first and second quarter revenue and has been praised for its AI and cloud capabilities as key to its growth.
Microsoft is the world's most valuable company, a $3.3 trillion market cap behemoth whose shares have risen 33% in the past year. In his decade as CEO, Satya Nadella has transformed Microsoft into a cloud-first, AI-first giant, despite earlier missteps that saw it lose out to the smartphone gold rush.
Microsoft turns 50 next year, and staying relevant through so many industrial, technological, political and business changes is no easy feat. But Microsoft has not only stayed relevant: Revenues, profits and just about every other metric continue to soar, driven by investments in the cloud and, more recently, generative AI.
While these companies are certainly benefiting from adopting new trends, there are other factors at play, notably investors who have fewer places to park their money to invest in new technologies.
Ray Wang, founder and principal analyst at Constellation Research, believes less competition in certain markets is driving investors toward larger companies.
“There's very little competition because of oligopolies and duopolies,” Wang told TechCrunch. “There used to be hundreds of software companies, but decades of mergers and acquisitions have narrowed the options down to just a few in every geography, category, market size and industry.”
Wang also pointed to the sluggish IPO market and the influence of the private equity sector as reasons for the strength of legacy technology companies.
“The IPO market has collapsed due to the COVID-19 pandemic. There are no startups that can grow into the next Oracle, SAP or Salesforce like before. Many software companies have been founded but their pipelines are poor and they are unable to scale,” Wang said.[And] Many PE buyouts destroy entrepreneurship and [have] We turned these companies into financial robots.”
There are many ways to slice and dice all of this, but it's the established software companies that are ultimately best positioned to thrive when breakthrough technologies like AI emerge, due to their market presence and stable customer base.
The respective cloud migrations are also a big part of the story, tying in nicely with the rise of AI, which relies heavily on the cloud.
They also have vast resources at their disposal, and strategic acquisitions play a big role in maintaining their presence: IBM recently made a $6.4 billion acquisition offer for HashiCorp, bolstering its hybrid cloud ambitions, while SAP revealed plans to pay $1.5 billion for AI-infused digital adoption platform WalkMe.
AI may have little impact on companies' bottom lines today, but it's a necessity for Wall Street. Alphabet, Amazon, and Microsoft have all recently hit new all-time highs, thanks in large part to AI. Apple's stock also hit an all-time high following its recent AI announcement, though “Apple Intelligence” isn't available yet.
The AI wave may be floating all boats for now, but Gartner's famous “hype cycle” predicts that interest in new technologies will wane once all the early experiments and implementations disappoint — a time known as the “trough of disillusionment.” According to Lovelock, this may already be coming, which means many of the multi-billion-dollar generative AI startups may have something to worry about.
“It's easy to get lost in the emerging software market,” Lovelock says, “and it's hard to get attention when new AI companies are boasting billions of dollars in revenue just a few years after launching. Yet the traditional software market is expected to exceed $1 trillion in total annual revenue in 2024. Legacy software sales are growing robustly, and the rapid growth of AI has made this fact invisible to many.”
Companies that have been around for decades are better positioned to thrive thanks to their existing foundations. We may be in an AI bubble, but once mainstream adoption really starts to take off, the SAPs, Oracles and IBMs of the world will be in a position to jump on board.