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Growth prospects and risk factors play a significant role in determining what is considered a “normal” or fair PE ratio. If a company is expected to grow faster or faces less risk than its peers, investors will generally pay a higher multiple for its stock. Conversely, slower growth or above-average risks are typically associated with a lower PE ratio.

Currently, SAP trades at a PE of 34x. This figure is higher than both the Software industry average of 27.1x and its peer group average of 30.6x, indicating a premium valuation compared to the broader market.

For additional context, Simply Wall St’s “Fair Ratio” for SAP is calculated at 39.7x. This proprietary metric improves upon broad industry averages or peer comparisons by considering SAP’s unique combination of earnings growth, risk profile, profit margins, and market capitalization. This offers investors a clearer perspective on what SAP’s multiple might be when accounting for its fundamental strengths, rather than relying on a general comparison.

Because SAP’s actual PE of 34x is below its Fair Ratio of 39.7x, the stock currently appears undervalued on this metric. This suggests potential for further upside if the company meets its growth and profitability expectations.

Result: UNDERVALUED

PE ratios tell one story, but what if the real opportunity lies elsewhere? Discover 1434 companies where insiders are betting big on explosive growth.

Earlier, we mentioned there is an even better way to understand valuation; let’s introduce you to Narratives. A Narrative is a simple, accessible way to describe your unique perspective on a company, giving a story behind the numbers, from what you think is a fair value through to your forecasts for revenue, earnings, and profit margins.

Narratives connect the dots between a company’s story, a financial forecast, and a fair value estimate, allowing you to see not just what a company is worth, but why investors believe that. This interactive investment tool is available inside Simply Wall St’s Community page, making it easy for anyone to create or browse different viewpoints from millions of investors.

With Narratives, you can instantly compare Fair Value to today’s Price to help decide when it may be the right time to buy or sell, with each Narrative adjusting automatically as new news or earnings updates arrive. For example, some investors project SAP’s fair value as high as €345, seeing strong cloud growth and margin expansion, while others are more cautious, suggesting a value as low as €192 if competitive pressures and regulatory costs outweigh the upside.

Do you think there’s more to the story for SAP? Head over to our Community to see what others are saying!

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

Companies discussed in this article include SAP.DE.

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