Sell First, Ask Questions Later?

SAP Crushes the Software Stack

I am always on the look out for opportunities where the market may have simply overreacted to a data point…for a day, a week or more. Yesterday may have been one of those days. Overnight in Germany, the software company SAP reported results and guidance which disappointed investors, the stock was down 23% on the day and importantly, from an opportunity standpoint, took the bulk of the software space down with it.

Here is what really caught my attention. While SAP continues to see robust interest in its solutions to drive digital transformation as customers look to emerge from the crisis with more resilience and agility, lockdowns have been recently re-introduced in some regions and demand recovery has been more muted than expected. Further and for the same reasons, SAP no longer anticipates a meaningful recovery in SAP Concur business travel-related revenues for the remainder of the year 2020.

In the first half of 2020, it looks like Concur was ~5% of total revenue for SAP. Anyone who has ever worked at a mid-sized company or larger has probably come across or heard of Concur. It is the cloud-based platform that most of us have used to fill out our expense reports so that we can be reimbursed after travel (not much of that going on lately) or after taking clients out (I can’t imagine that people are running up big T&E bills these days).

Where are the possible opportunities? The first place that jumps to mind is in the cyber security space. SAP is not involved in this area of the software market. This is from their site.

But, are companies really going to pull back from spending on cyber security? Especially when more and more of us are working from home? Maybe they will but I have to think that security is still a priority. Is it possible that some names were sold off yesterday due to the SAP news? Does it make sense to look at a fund like the ETFMG Prime Cyber Security ETF (HACK), which was down by more than 3% during the day? I think it does, with $45 as a line in the sand. Breaking that mark tells me that the issues in the software space go beyond just SAP.

Now more than ever, investors seem to operate in a shoot first ask later mindset. Does a hit to one software name mean the whole group is weak? No. This happens over and over, across industries, sectors and the market in general. This presents opportunity.

PS: After the close last night, F5 Networks (FFIV) a holding in HACK reported results that beat expectations.

Let me know what you think.