The software apocalypse never came, and the sector is enjoying a stellar recovery. But the challenge for investors has shifted to another conundrum.
"There's still the question of who will be a winner and who will be more in the loser box," SAP CEO Christian Klein told Barron's on Thursday after the company's third-quarter earnings.
It's easier to say that when your company is increasingly showing signs it belongs in the winners category. The German software giant, Europe's sixth most valuable company, topped 10 billion euros ($11.2 billion) in quarterly revenue for the first time.
SAP's American depositary receipts jumped 4% in morning trading Thursday, defying the sharp tech selloff.
Its business AI platform, which uses AI assistants and agents to help companies and organizations manage operations and workflows, is starting to pay off. Cloud revenue jumped 25% to EUR6.7 billion, driven by its business AI, data and platform business. Its current cloud backlog is up 26% to EUR24.1 billion.
Software stocks indiscriminately tumbled earlier this year as investors feared that rapid developments in artificial intelligence would disrupt the sector.
SAP was very much caught up in it. The ADRs fell around 40% from the start of the year to its 52-week low on July 23. But the stock has climbed more than 60% in the three months since, beating the iShares Expanded Tech-Software Sector ETF's 22% rise over the same period.
The sector's slump led to some soul-searching at SAP. "It doesn't feel nice. Everyone doesn't feel so well if the stock is not performing. But especially in those days it was super important to focus on the product and the customers and say 'is the strategy we have the right one?'," Klein said.
A number of lessons were learned very quickly, aided by customer feedback.
"A lot of customers realized: Hey, I can develop an agent super quickly and deploy it the next day. But what about the accuracy?" Klein said. "All the LLMs [large language models] are well trained, but they have no clue about [your] business data, about how to run a business."
That was the first lesson, leading to a realization that SAP needed to build a business AI platform. Then as they experimented it became clear that AI agents had plenty to learn -- from tax calculations specific to the U.K. or Germany, data privacy, the inner workings of HR, finance, supply chain, and much more. And crucially, to build trust among the businesses using the AI platform.
Existing customers got their hands on the latest tools in the third quarter but SAP also revealed a list of new clients across sectors, including Spain's Banco Bilbao, German semiconductor manufacturer Infineon, and South America's largest railway manufacturer Greenbrier Maxion.
The U.S. Defense Logistics Agency is another notable addition. "The [U.S.] government really like what they see," Klein said. "And we are winning customers in the public sector, so it's a win-win."
The company also said it's working with AstraZeneca to develop AI solutions in the life sciences industry.
From a broader perspective, it suggests more and more companies are embracing AI and exploring the potential benefits and efficiencies it can bring.
Shiny, new consumer-facing AI tools like Meta's Muse may be grabbing the spotlight. But as the world rapidly changes and businesses ramp up their appetite for AI, SAP is looking like a winner.
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