Lubin Investment · Blog

SAP (SAP): Q2 2026 results, my verdict

2026-07-23 ·

SAP: see the full analysis on Lubin Investment

SAP reported earnings above consensus on July 23, 2026, cloud revenue up 22%, and quarterly free cash flow up 27%. On my 10-criteria filter, the company scores 9 out of 10. Yet it is trading today at the lowest point in its own five year valuation history. Here is how I separate quality from price.

A quarter that beats consensus, driven by cloud

SAP reported adjusted earnings per share of €1.89 on July 23, 2026, above consensus by roughly 22 cents. Total revenue reached €9.9 billion, up 9% year over year, but the real signal is in the mix: cloud revenue jumped 22% to €6.3 billion, more than twice the pace of the company as a whole. IFRS operating profit grew 8% to €2.6 billion, and quarterly free cash flow surged 27% to €3.0 billion.

The most important metric for judging what comes next, however, is neither revenue nor this quarter's profit, it is the current cloud backlog, which measures the value of cloud contracts already signed but not yet billed: it reached €22.9 billion, up 27%. This is a more reliable leading indicator than the quarter's revenue, since it shows how much future revenue is already contractually secured before it is even recognized. SAP reiterated its 2026 cloud revenue guidance of €25.8 to €26.2 billion, and raised its non-IFRS operating profit target to a range of €11.8 to €12.2 billion.

Why the total is slowing while cloud accelerates

SAP sells enterprise resource planning (ERP) software, the systems that run accounting, procurement, payroll and supply chains for the world's largest companies. Historically, this software was sold as a perpetual license installed on the customer's own servers. SAP is now migrating its customer base to a subscription cloud model (the RISE with SAP program), which explains the two-speed pattern observed: cloud revenue is exploding (+22%) while classic license revenue declines, which slows the headline growth rate (7.6% a year on average over recent years, judged insufficient by my filter) without reflecting the business's real momentum. This is a transition that penalizes total revenue in the short term to build more predictable, more profitable recurring revenue over the long term.

Two acquisitions announced this quarter show where SAP is putting this cash to work: Prior Labs, a lab specializing in foundation models for tabular data (AI models trained not on text, but on structured data like payment behavior, supplier risk or customer churn risk), in which SAP will invest €1 billion over four years while keeping it independent to preserve its research speed; and Dremio, a data lakehouse platform that unifies access to SAP and non-SAP data without moving or transforming it. The logic: SAP sits on the structured data (sales, procurement, payroll) of the world's largest companies, an asset that general-purpose AI models trained on text simply do not have. This is a management bet consistent with the company's moat, not an off-topic diversification.

What my quality filter says: 9 out of 10 criteria

On my standard model, SAP validates 9 out of 10 criteria, one of the highest scores I track. Net margin comes in at 19.5%, solid for a company still in the middle of a cloud migration. The real quality signal is margin expansion: my operating leverage criterion turns green, meaning revenue is growing faster than costs, exactly the trajectory expected from a successful cloud transition. Free cash flow per share grows 16.1% a year on average, driven by annual free cash flow rising from €4.77 billion in 2022 to €8.42 billion in 2025, nearly doubling in three years. Cash return on invested capital reaches 51.2%, and cash conversion of earnings stands at 118%, meaning SAP's reported profit converts into more actual cash than it shows on paper, a sign of very high accounting quality.

One last reassuring point: SAP carries no net debt, it holds a positive net cash position, after cutting total debt from €13.1 billion in 2022 to €7.5 billion in 2025. A company that self-funds both its cloud transition and its technology acquisitions, without raising net debt, has real strategic flexibility. The only point my filter cannot assess is the cash conversion cycle (the time between paying suppliers and collecting from customers), not computable for SAP for lack of sufficient inventory and cost-of-sales data, a normal limitation for a software vendor that does not sell physical goods.

The price in three steps

Step one: where does today's price sit in SAP's own history? The P/FCF (share price divided by free cash flow generated per share) stands at 20.4 times. This multiple sits at the 0th percentile of the stock's five year history: on this measure, it is the cheapest point the stock has ever traded at over this period. Against the other 165 enterprise software companies tracked by my screener, this same multiple sits at the 39th percentile, cheaper than 61% of sector peers, while the sector median runs around 24 times.

Step two: why this level? This is the paradox of the story: at the very moment free cash flow is accelerating the most (+27% this quarter, +16.1% a year over five years) and the cloud backlog is jumping 27%, the valuation multiple is hitting its lowest point on record. A plausible explanation: the market keeps pricing SAP based on slowing total revenue (7.6% a year, below my 10% threshold), without fully pricing in that this slowdown reflects a business model migration rather than a loss of momentum, or remains cautious about the cost of the two announced acquisitions (over €100 million of expected dilution to 2026 profit).

Step three: is it justified? My reasonable buy price model, which projects free cash flow per share five years out, puts the entry price at $251.62 for SAP, against a current price of $146.38, a 71.9% discount under this strict calculation, one of the widest gaps I currently observe on a company scoring 9 out of 10. A discount this size on a stock of this quality deserves to be taken seriously, while keeping in mind that a P/FCF at a historical low can also reflect a legitimate market concern about the pace of the total revenue slowdown, not purely a pricing inefficiency.

How I read it

SAP combines a rare mix: fundamental quality among the best I track (9 out of 10 criteria, expanding margins, positive net cash, accelerating cash flow), a genuine growth story in its most profitable segment (cloud, +22%, backlog +27%), and yet a five year low valuation. These are exactly the two questions I always ask separately: the quality of the business, independent of price; then the price, independent of quality. Here, both point in the same direction, which makes this stock particularly interesting to watch. You can find the full breakdown on the SAP analysis page, a fuller explanation of free cash flow in my guide on FCF margin, and my methodology.

FAQ

Why is SAP's total revenue growing only 7.6% a year if cloud is exploding?

Because SAP is in the middle of a business model migration: classic perpetual license revenue is declining while subscription cloud revenue (+22% this quarter) takes over. The total slows in the short term, but the revenue mix becomes more recurring and more profitable.

What are Prior Labs and Dremio, acquired by SAP?

Prior Labs builds AI models trained on structured enterprise data (payments, supplier risk, churn), and Dremio is a platform that unifies access to SAP and non-SAP data without moving it. SAP is investing €1 billion over 4 years in Prior Labs, kept independent.

Why is SAP's P/FCF at a 5 year low despite good results?

The market appears focused on slowing total revenue (7.6%/year, below my 10% threshold) rather than accelerating cloud and free cash flow (+27% this quarter), or remains cautious about the cost of the two recent acquisitions.

Does SAP carry debt?

No, SAP holds a positive net cash position after cutting total debt from €13.1 billion in 2022 to €7.5 billion in 2025, while funding its cloud transition and technology acquisitions without raising net debt.

Should I buy SAP stock after these results?

My quality grid is excellent (9 out of 10 criteria) and my strict pricing model shows a 71.9% discount, at a five year low. This is not personalized investment advice, do your own research.

SAP: see the full analysis on Lubin Investment

About the author

Written by Lubin Danilo, founder of Lubin Investment. A self-taught individual investor, I find fundamental analysis fascinating, and it has delivered excellent results. For three years now, my performance has beaten the S&P 500. But analyzing every stock took too much time: sites with incomplete data, calculation methods and criteria never aligned with mine. And spotting the best stocks was just as time-consuming, even with my own well-defined checklist. So I put my software development background to work to build this software, base my investment strategy on its results, and share it with people who share the same passion as me. It judges a company's quality and its price separately, using criteria drawn from the financial literature (Warren Buffett, Michael Mauboussin, Aswath Damodaran).