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Why SAP Stock Crashed Today

By Anders Bylund – Oct 26, 2020 at 1:44PM

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The German business software giant cut its full-year guidance targets to reflect a slower-than-expected recovery from the COVID-19 health crisis.

What happened

Shares of SAP (SAP -0.78%) fell as much as 23.9% on Monday morning, recovering to a slightly milder 23.1% drop as of 12:45 p.m., EDT. The German provider of enterprise software and related services updated its full-year guidance and longer-term business plan, including a heavy top-line hit from currency exchange effects and the global COVID-19 pandemic.

So what

SAP lowered the midpoint of its full-year revenue guidance range by 2%, stopping near $32.5 billion. Adjusted revenues should land in the neighborhood of $8.29 per share, 0.5% below the existing guidance figures. A strong cash flow trend throughout the year led to rosier guidance for SAP's cash generation. The operating cash flow target was raised by 20% to $7.1 billion, while free cash flows were lifted by 13% to approximately $1.1 billion.

A yellow charting arrow pointing downward.

Image source: Getty Images.

Now what

The earlier outlook was based on fewer COVID-19 lockdowns and a more rapid reopening of closed-down industries around the world than what actually happened. Lockdowns are coming back in areas that were doing well over the summer, and the demand for SAP's enterprise business solutions is "more muted than expected," according to the company's press materials. In particular, the travel-oriented SAP Concur business is not expected to recover to a meaningful degree by the end of this year.

SAP's lowered guidance could spell trouble for the business software sector as a whole. As for SAP itself, this sharp drop looks like an overreaction when you consider the company's rising cash flows.

Anders Bylund has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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