ASML and SAP Titans Sweet Moment May Go Sour

ASML and SAP Titans Sweet Moment May Go Sour
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Both improve their targets, but investors have already discounted much of the good news

ASML and SAP are on a roll. Europe’s tech titans, worth € 251 billion and € 146 billion respectively, improved their 2021 revenue targets yesterday. Investors have already discounted much of the good news, however.
Admittedly, both companies are based on well-established technology trends. ASML, which sells machines that allow manufacturers to produce chips, is benefiting from a shortage of semiconductors across the industry. Key customers like Taiwan Semiconductor Manufacturing (TSM), worth $ 541 billion (€ 460 billion), are investing in additional equipment to alleviate shortages.

ASML President Peter Wennink on Wednesday raised his revenue forecast for 2021 for the second time this year. He now expects sales to rise 35%, up from 30% in April and a mere “double-digit” growth forecast for January.

For his part, SAP chief Christian Klein is getting customers to abandon old software licenses and switch to his subscription-based cloud computing services. Its flagship product, RISE, enables clients such as Etihad Airways and Siemens Energy to run core business operations, such as finance and supply chain management, on remote servers for a recurring fee. It is easier than running the software locally on your own machines. On Wednesday, Klein raised its forecast for cloud revenue for 2021 to 9.3 billion euros, down from 9.2 billion, after a similar improvement in April.

The two trends have a journey. The ASML kit could be even more in demand if politicians in Europe and the United States push for the construction of local chip plants to reduce their dependence on Asian factories. And the pandemic has prompted more companies to revamp their IT systems, which means that Klein’s RISE product should continue to gain customers.

The problem is that investors already anticipate continued success. Analysts expect Klein’s cloud revenue to more than double by 2025, reaching almost € 22 billion, according to Refinitiv’s median estimates, which is in line with its own long-term goals, outlined in October. SAP’s price-to-earnings ratio has already risen to 24 times, compared to 18 times it was paid just after Klein announced its goals.

ASML, meanwhile, is trading at more than 40 times earnings, compared to a two-year median level of 34, according to Refinitiv data. If either growth engine disappoints, so could the duo’s inflated stocks.