Software giant SAP (NYSE: SAP ) traded higher on Thursday after growing revenue 1.5% in the second quarter, driven by strong performance in cloud subscriptions and maintenance revenue. Yet, as cloud competition continues to negatively affect its traditional software business, should SAP seek additional acquisitions in middleware, cloud, or big data, such as TIBCO Software (NASDAQ: TIBX ) or Tableau Software (NYSE: DATA ) , to strengthen its investment outlook?
Product cannibalization is not an easy problem
SAP is an enormous $100 billion technology company that has made its fortune selling enterprise software. However, the rise of cloud computing has posed a problem for the software giant, which was evident in its second-quarter report.
The company reported revenue of nearly $5.7 billion with its support segment, which deals with business infrastructure and maintenance, accounting for over $3 billion with 4% year-over-year growth. Essentially, this business is stable, but the company's traditional software licensing revenue has fallen victim to the rise of cheaper cloud services.
This segment accounted for $1.3 billion and fell 2% year over year, which was an improvement from the first quarter's 5% decline. Albeit, support and software are the company's largest segments, with the under-performance of the latter holding back the strong performance of the former.
Something's still missing
In addition to support and software, SAP is doing its part to build a valuable cloud business, which grew 32% in the second quarter. However, this segment accounted for less than $350 million in revenue, now on a $1.6 billion revenue run-rate.
Nonetheless, SAP has shown a willingness to be acquisitive in building its cloud presence, including $7.7 billion to acquire Ariba and SuccessFactors in 2012. Ariba is a leading cloud-based business commerce network, while SuccessFactors has strengthened SAP's position in human capital management solutions.
Therefore, SAP has a solid base of cloud offerings to build on, but as a business whose goal is to improve the infrastructure, ecosystems, and overall technology of its enterprise clients, it's not illogical to suggest that SAP still needs more. Plus, with over $6 billion in cash, retained earnings in excess of $17 billion, and a strong balance sheet, additional acquisitions could strengthen its outlook.
Specifically, SAP lacks a core offering to benefit its customers -- software to collect and utilize big data. In today's cloud world, big data is a crucial element to success, as the technology is now present to use such data to make well-informed business decisions that can help e-commerce business advertise, social media companies grow users, or retail companies price products more attractively, all of which are industries that SAP serves.
Does SAP need big data?
Earlier this year, a German publication called Der Aktionaer reported that SAP was eyeing TIBCO. It was believed that SAP would be interested in TIBCO's middleware business, which grew 18% during its last quarter. However, Tibco's Spotfire fast-data platform, which analyzes data in real time, must also be appealing.
With Tibco's stock falling significantly, such an acquisition could become a reality. However, the fact that Tibco's license revenue fell 7% year over year in its last quarter is a concern. Therefore, Tableau makes an interesting option to strengthen SAP's big data business.
Tableau uses slow data, analyzing months, rather than instant data, and has essentially stolen Tibco's growth over the last few quarters. Tableau's license revenue rose 83% year over year during its last quarter, with the company expected to create $352 million in revenue this year. Given the fact that Tableau shares are lower by nearly 50% from previous highs, SAP could make a run for it.
While cloud revenue remains a small piece of SAP's overall pie, the overall market is expected to reach $200 billion by 2020. Ariba and SuccessFactors were a good start to grow its cloud business, but big data would be a great addition.
With the company wanting to generate over $4 billion via cloud services by 2017, and saying that it's willing to make more large acquisitions, Tableau definitely seems like a good fit. Therefore, SAP may look pricey at 21 times earnings, but a stronger footprint in the cloud could make it more attractive to long-term investors.
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