09. March 2021 | 10:23 CET
SAP, Aspermont, IBM - Disruptive changes through digitization: Recognize potentials and act in time!
In 1996, Microsoft founder Bill Gates wrote an essay entitled "Content is King". In it, he assumed that the emerging Internet would develop into a marketplace for content in the years to come. He was right but did not take into account the users' low willingness to pay and the resulting importance for advertising. And this is where other companies such as Google came out on top. As digital transformation has progressed, however, a trend in the other direction has become apparent in recent years: The introduction of flat rates (Spotify, Netflix), cloud solutions (iCloud, Google Drive) and anything-as-a-service models (e.g., software: Adobe Suite, Microsoft Office 365) is encouraging people to pay for content if they receive reliability, up-to-dateness and ease of use in return - provided, of course, that the price/performance ratio is perceived as reasonable. The following companies have a unique opportunity to benefit from the power of transformation.
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ISIN: DE0007164600 , AU000000ASP3 , US4592001014
SAP SE - Rising revenues thanks to cloud computing and remote services
When people talk about the one German player in the international software business, they always mean SAP, the software Company from Walldorf near Heidelberg. The Company, which is now valued at EUR 126 billion on the stock exchange, is the third-largest software Group after Microsoft and Oracle. The topic of digital transformation towards cloud computing and cloud storage cannot bypass such a company. On the contrary, SAP recognized these trends early on and developed strong, standalone cloud solutions such as SAP S4/HANA and always shown itself to be open to cross-platform applications. Therefore, it is possible to connect SAP cloud computing solutions via open interfaces (APIs) even with third-party installations such as Google, Amazon Web Services or Microsoft Azure. This openness is an important argument for many customers.
As a result, this business area at SAP has grown steadily in recent years and now accounts for more than 25% of the Group's total business. The Company has announced that it will be massively pushing its cloud business in the next few years. By 2025, the share is expected to reach 85%, while the traditional software licensing business will decline sharply. Against the backdrop of the business model's restructuring, revenue and earnings forecasts were also revised downward last fall, contributing to a share price slump of up to 20%. Another reason was that the supposedly "Corona-safe" title, which had climbed from EUR 87 to EUR 142 in the previous six months, was now feeling the effects of the global pandemic.
In the meantime, however, the share price has again exceeded the critical EUR 100 mark. Since the share price performance in recent years has been strongly oriented towards the DAX, we assume that the setback will turn out to be only temporary and that the share will recover again in the foreseeable future. Investors can take advantage of this opportunity and go on a buying spree at relatively low prices.
Aspermont Ltd. - Transformation and new potentials
Even older than IBM, which is over 100 years old, are two magazines belonging to the Australian media Company Aspermont: the Mining Journal (founded in 1835) and the Mining Magazine (founded in 1909). Both have proven to be as resilient as IBM, appearing consistently since their inception. However, the Company, which until 2014 made its revenue of around AUD 40 million almost exclusively from print advertising and events, suffered relatively badly from digitization. More than three-quarters of its revenue collapsed in a short period.
A new management team appointed in 2015 initiated the turnaround by fully focusing on the transformation into a digital company with the pillars of XaaS, service delivery and data provision. In doing so, the Company can draw on a database of over 7.5 million contact details of decision-makers in the mining, energy and agribusiness sectors. Although sales are still a long way from reaching pre-transformation levels, all indicators are pointing upwards. The number of monthly active users had compound annual growth of 23% from 2016 to 2020 to 277,000. The Company still sees a lot of potential in the further monetization of its subscription business. So far, the media Company has convinced around 8,000 business customers to subscribe to a fixed-term contract on average of more than over 1,000 AUD per year.
The substantial increase in free cash flow has boosted the Company's cash position. In addition, Aspermont carried out a AUD 3 million capital increase earlier this month. 100 million shares were issued at AUD 0.03 each. Going forward, the Company plans to invest these funds in expanding its XaaS and data businesses to generate long-term organic growth. This sounds like a coherent and convincing concept. Investors should also not be irritated by the low share price. Often this is the case on the Australian stock exchange, where there is a considerable number of shares in circulation. In the case of Aspermont, there are almost 2.4 billion (!) share certificates. The Company is therefore valued at around AUD 70 million.
IBM Corp. - From punch cards to cloud business, caught in the transformation loop?
If there is one Company in the world that can sing a song about transformations of its business model, it is probably IBM. Founded more than 100 years ago as a manufacturer of punch card readers, the Company has had to change its business model several times in its history, sometimes radically, like the seven proverbial lives of a cat.
Fortunately, the management has mostly shown foresight in its decisions, such as with the sale of its entire PC and notebook division to the Chinese Lenovo Group in 2005. IBM was sure that this division, which had been part of the Company's core for decades, would become massively less important in the future. Instead, the consulting division was taken over by PricewaterhouseCoopers and expanded to become the largest management consultancy in the world.
On the hardware side, the Group, which today is ahead of Samsung with the most patent applications per year worldwide, concentrated on mainframes and storage solutions. The cloud computing and storage sector is currently ensuring full order books. The Covid-19 pandemic did cause the business to stall somewhat in 2020. But a seemingly never-ending transformation of the corporate giant demanded a lot of patience from investors in the past. Even the far-sighted value investor Warren Buffett found it too much - and that's saying something. Buffett divested himself of his IBM stake in 2017, which at times was worth more than USD 10 billion. It remains exciting.