Shares of SAP (ETR:SAPG) (NYSE:SAP) declined by about 4% on Wednesday after Goldman Sachs reduced its gross margin expectation for the German software group for the second half of 2026. The bank said the cut reflects higher hardware costs anticipated in the latter part of the year.
Despite the revision, Goldman retained a Buy rating on the shares, stating that SAP's narrative around AI-led product development remains intact and continues to support the company's long-term positioning.
Margin and earnings revisions
Goldman lowered its estimate for SAP's gross margin in 2H26 to 72.8% from a prior 73.3%, a move the bank attributed to elevated hardware expenses. That margin adjustment pushed Goldman's forecast for full-year EBIT growth toward the lower half of SAP's guidance range - to about 15% year-on-year excluding currency effects - down from a previous estimate of roughly 16%.
The analysts, led by Mohammed Moawalla, indicated that the company's two pending acquisitions - Dremio and Prior Labs, which have not yet closed - should have minimal impact on revenue but would be modestly dilutive to margins. Goldman noted that SAP expects to offset those dilutive effects through cost efficiencies elsewhere.
Cloud backlog and recent acquisitions
Goldman did not change its assumptions for organic cloud current backlog (CCB) growth, keeping its second-quarter estimate at 23.5% year-on-year on an organic basis excluding currency effects. The bank did, however, raise its reported CCB forecast for fiscal 2026 slightly to reflect the recently closed Reltio acquisition, which Goldman said contributes roughly 80 basis points to reported growth. With that inclusion, Goldman put its headline second-quarter CCB growth estimate at 24.8% excluding currency.
The report also flagged that a particular Middle Eastern customer is expected to scale down activity over upcoming quarters, a development the analysts expect will weigh on cloud revenue growth into the second quarter.
Near-term outlook and event timeline
SAP is due to release second-quarter results on July 23. Goldman anticipates a macroeconomic and geopolitical backdrop broadly similar to the conditions that prevailed at the end of the first quarter, noting ongoing geopolitical uncertainty as a factor in its outlook.
Goldman described signs of pipeline improvement observed at SAP's SAPPHIRE user conference as encouraging, while emphasizing that conversion rates remain the critical variable in translating pipeline health into revenue. The bank left its longer-term view unchanged, reiterating that SAP presents an idiosyncratic product-cycle story within software, with AI-led tools serving as an accelerant to the company's cloud migration strategy and agentic AI offering an additional growth lever based on SAP's proprietary data advantages.
Price targets and market reaction
Goldman maintained its 12-month price target for SAP in euros at 230, while marginally reducing its American Depositary Receipt (ADR) target to $265 from $271, citing foreign exchange movements. The share-price decline followed the margin revision and accompanying guidance adjustments.
Key takeaways
- Goldman trimmed 2H26 gross margin to 72.8% from 73.3% due to higher hardware costs, nudging full-year EBIT growth toward the lower end of SAP's guidance.
- Organic cloud backlog growth assumptions were left intact, with reported CCB modestly lifted for FY26 to include the Reltio acquisition.
- Pending acquisitions Dremio and Prior Labs are seen as marginally margin dilutive but revenue-neutral, with SAP planning to offset impacts via cost efficiencies.
Sector implications
The adjustments and near-term headwinds are relevant to the enterprise software sector, cloud-service providers and hardware suppliers servicing large-scale enterprise deployments. Changes in gross margin expectations highlight the sensitivity of software vendors' profitability to hardware cost dynamics and to customer concentration patterns in cloud revenue.
Risks and uncertainties
- Geopolitical uncertainty - Goldman expects a similar macro backdrop to the end of Q1, underscoring ongoing geopolitical risks that could influence demand and operating conditions.
- Customer concentration - Analysts cited a Middle Eastern customer expected to ramp down activity, which could pressure cloud revenue growth in coming quarters.
- Conversion execution - While pipeline improvement was noted at the SAPPHIRE conference, the analysts emphasized that conversion rates are the key variable in translating pipeline strength into sustained revenue gains.
Conclusion
Goldman's revisions and the market reaction underline the near-term trade-offs between hardware cost pressures and SAP's strategic growth initiatives, including cloud migration and AI-enabled product development. While the bank preserved a positive long-term view anchored in SAP's product cycle and AI potential, it adjusted margin and earnings expectations enough to prompt a noticeable pullback in the stock ahead of the company's July 23 earnings release.