There\u2019s something of a trend around legacy software firms and their soaring valuations: Companies founded in dinosaur times are on a tear, evidenced this week with SAP<\/a>\u2018s shares topping $200 for the first time.<\/p>\n Founded in 1972, SAP\u2019s valuation currently sits at an all-time high of $234 billion. The Germany-based enterprise software provider was valued at $92 billion two years ago, and $156 billion 12 months back, meaning its market cap has grown more than 50% in the past year alone.<\/p>\n Market valuations shouldn\u2019t be conflated with company health, but it\u2019s a useful indicator of how a company is doing \u2014 whether that\u2019s through actual financial performance or meaningful moves it\u2019s making to shift with the times.<\/p>\n CEO Christian Klein<\/a> has overseen SAP\u2019s turnaround since 2020, focusing on helping customers transition<\/a> to the cloud while striking useful partnerships with hyperscalers such as Google<\/a> and Nvidia<\/a> along the way.<\/p>\n SAP\u2019s rapid rise can partly be attributed to this transition from an old-school license model, with its Q1 2024 report revealing<\/a> year-on-year cloud revenue growth of 24%, a figure it said it expects to rise further in the next 12 months<\/a> due to its \u201ccloud backlog\u201d income in the pipeline. Injecting \u201cbusiness AI<\/a>\u201d across its cloud suite is also playing a part in this trajectory.<\/p>\n Reports emerged last year that its on-premises customers had become disgruntled<\/a> with how SAP was putting its new technology into its cloud products only<\/a>. But rather than pandering, SAP\u2019s doubling down on its push to bring them to the cloud, offering its on-prem customers<\/a> discounts to make the transition<\/a> \u2014 an AI carrot on a cloud stick, if you will.<\/p>\n Investment management company Ave Maria World Equity Fund recently highlighted<\/a> SAP as one of its top three performers in Q1 2024, noting SAP\u2019s transition \u201cfrom a perpetual license model to a SaaS model\u201d will create a larger total addressable market (TAM) and greater margins.<\/p>\n And it\u2019s such efforts that are driving the fortunes of SAP and similar legacy software companies, according to Gartner chief forecaster John-David Lovelock<\/a>.<\/p>\n \u201cThere are a few tailwinds aiding growth \u2014 preferences for cloud over on-premises systems, upgrades and expansion requirements,\u201d Lovelock told TechCrunch. \u201cBut the primary effect is simply digital business transformation efforts that started in 2021 are ongoing.\u201d<\/p>\n And what about Oracle, the U.S. database and cloud infrastructure company founded in 1977? Oracle is valued at more than $385 billion as of this week, 20% up on last year, though this figure was at almost $400 billion a couple of weeks back \u2014 far and away its highest ever valuation.<\/p>\n The reasons for this are roughly comparable to that of SAP: \u201cAI-fueled cloud growth<\/a>,\u201d the result of a long transition away<\/a> from an on-premises model.<\/p>\n Notably, Oracle\u2019s fiscal 2024 Q3 earnings<\/a> saw the company pass a key milestone, with its total cloud revenue \u2014 that\u2019s SaaS (software-as-a-service) plus IaaS (infrastructure-as-a-service) \u2014 surpassing its total license support revenue for the first time.<\/p>\n \u201cWe have crossed over,\u201d Oracle CEO Safra Catz said on the earnings call<\/a>.<\/p>\n At its Q4 earnings<\/a>, Oracle reported modest revenue growth of 3% \u2014 but this figure increased to 20% for cloud-specific revenue. And more is to come, says Catz, projecting double-digit cloud revenue growth in the coming financial year. This has been aided by partnerships with the likes of Microsoft<\/a>, Google<\/a>, and generative AI darling OpenAI<\/a>, which are seeking all the cloud infrastructure they can get \u2014 OpenAI plans to use Oracle\u2019s cloud to train ChatGPT.<\/p>\n \u201cIn Q3 and Q4, Oracle signed the largest sales contracts in our history \u2014 driven by enormous demand for training AI large language models in the Oracle Cloud,\u201d Catz said.<\/p>\n As with SAP, Oracle also recently inked a deal<\/a> with Nvidia to help governments and enterprises run \u201cAI factories\u201d locally using Oracle\u2019s distributed computing infrastructure.<\/p>\n It\u2019s not all a rosy outlook, though: One of Oracle\u2019s flagship customers, TikTok, is facing a ban in the U.S.<\/a>, with Oracle warning this week<\/a> that this could affect its revenues in the future.<\/p>\n IBM, the company founded in 1911 as Computing-Tabulating-Recording Company<\/a>, reached an 11-year high in March<\/a> of $180 billion, just 6% off an all-time record.<\/p>\n The company\u2019s valuation has fallen around 14% since then to under $160 billion, but it remains 30% up on last year.<\/p>\n IBM was once a hardware company, with mainframes and PCs the order of the day, but \u201cBig Blue<\/a>\u201d segued into a software and services company<\/a>, which now makes up most of its revenue<\/a>. IBM spun out its legacy infrastructure services business as a stand-alone entity called Kyndryl in 2021<\/a>.<\/p>\n IBM began its cloud journey in 2007 with Blue Cloud<\/a>, continuing through the years with the launch of IBM Cloud<\/a> and through milestone megabucks acquisitions such as Red Hat<\/a>. In tandem, IBM has also pushed AI front and center, starting with IBM Watson<\/a> and more recently a slew of AI services<\/a> to support AI demand in the enterprise \u2014 this included the launch of Watsonx<\/a>, which helps companies train, tweak, and deploy AI models.<\/p>\n \u201cClient demand for AI is accelerating, and our book of business for Watsonx and generative AI roughly doubled from the third to the fourth quarter,\u201d IBM chairman and CEO Arvind Krishna said at its Q4 2023 earnings in January<\/a>.<\/p>\n IBM\u2019s recent financials have been something of a mixed bag, with its Q1 2024<\/a> numbers showing a small revenue hike that missed analyst estimates and earnings that beat estimates. On the other hand, its consulting revenue fell slightly.<\/p>\n However, two months on, analysts are bullish about IBM\u2019s path, with Goldman Sachs this week giving<\/a> IBM a \u201cbuy\u201d rating off the back of its AI investments and continued focus on infrastructure software.<\/p>\n \u201cWe believe that IBM is in the middle innings of pivoting its portfolio to a suite of modernized application and infrastructure software and a broader array of services, away from a legacy-focused portfolio,\u201d Goldman Sachs\u2019 analyst James Schneider said<\/a>.<\/p>\n It\u2019s too early to say how this sentiment will age, but IBM\u2019s AI investments are paying dividends<\/a> as far as Wall Street is concerned.<\/p>\n SAP, Oracle, and IBM aren\u2019t the only legacy software companies enjoying fruitful times. Intuit, a 41-year-old financial software company, hit<\/a> the giddy heights of $187 billion last month, just a fraction below its Pandemic-era high<\/a> of $196 billion. As with others, Intuit has been investing heavily<\/a> in AI as part of its push to remain relevant, and this is the first thing<\/a> it talks about at its earnings calls. <\/p>\n And Adobe, founded in 1982, is also doing pretty well<\/a>, with its valuation up 8% year-on-year to $236 billion \u2014 Adobe reported record Q1 and Q2 revenues<\/a> with AI<\/a> and cloud touted as pivotal to this growth<\/a>.<\/p>\n Microsoft is the world\u2019s most valuable company, a $3.3 trillion juggernaut whose shares have surged 33% in the past year. A decade in the hot seat<\/a>, Satya Nadella has transformed Microsoft into a cloud-first<\/a>, AI-first<\/a> colossal company, having lost out on the smartphone gold rush<\/a> due to prior missteps.<\/p>\n Microsoft turns 50 next year, and staying relevant after so many industrial, technological, political, and managerial shifts isn\u2019t easy. But Microsoft hasn\u2019t just remained relevant \u2014 its revenues, profits, and just about every other metric<\/a> continue to surge, due to its investments<\/a> in the cloud and, more recently, generative AI<\/a>.<\/p>\n While these companies are definitely benefiting from embracing new trends, there are other factors at play as well \u2014 in particular, investors don\u2019t have many places to park their money to make bets on new technology.<\/p>\n Ray Wang<\/a>, founder and principal analyst at Constellation Research<\/a>, believes the decrease of competition in certain markets has helped drive investors toward the biggies.<\/p>\n \u201cThere\u2019s minimal competition as we are in oligopolies and duopolies,\u201d Wang told TechCrunch. \u201cWe used to have hundreds of software companies, but decades of mergers and acquisitions have whittled down the options to a few companies in every geography, category, market size, and industry.\u201d<\/p>\n Wang also pointed to the stagnant IPO market<\/a>, as well as the impact of the private equity sphere, as reasons why legacy technology companies are doing well.<\/p>\n \u201cCOVID killed the IPO market \u2014 we don\u2019t have the startups of the past that can grow to become the next Oracle, SAP, or Salesforce. The pipe has been bad despite the number of software companies being started \u2014 they have not gotten to scale,\u201d Wang said. \u201c[And] a lot of the acquisitions<\/a> by the PE firms<\/a> have destroyed the spirt of entrepreneurship and [have] turned these companies into financial robots.\u201d<\/p>\n There are many ways to slice and dice all this, but well-established software firms are ultimately better positioned to thrive when a game-changing technology such as AI comes along, owing to the fact they have a market presence and stable customer base.<\/p>\n Their respective cloud transitions are also a big part of the narrative, tying in neatly with the rise of AI, which is heavily dependent on the cloud<\/a>.<\/p>\n They also have significant resources at their disposal, with strategic acquisitions playing a major part in their push to stay relevant: IBM is bolstering its hybrid cloud ambitions with its recent $6.4 billion bid for HashiCorp<\/a>, while SAP revealed plans to pay $1.5 billion<\/a> for AI-infused<\/a> digital adoption platform WalkMe.<\/p>\n AI might be having a minimal impact on companies\u2019 bottom line today, but it\u2019s a must-have as far as Wall Street is concerned: Alphabet<\/a>, Amazon<\/a>, and Microsoft have all hit record highs of late, and AI is a major part of it<\/a>. Apple\u2019s shares also hit an all-time high<\/a> off the back of its recent AI announcements<\/a>, even though \u201cApple Intelligence\u201d isn\u2019t available yet.<\/p>\nOld SAP<\/h2>\n
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\n<\/figcaption>Hist-Oracle<\/h2>\n
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Big Blue eyes return<\/h2>\n
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Legacy-building<\/h2>\n