SAP (XTRA:SAP) Q3 Results Spotlight AI Backlog And Rich Valuation

SAP stock closed at €215.45 on Thursday, near its recent highs after a powerful run over the past quarter. The latest Q3 2026 release gave traders more fuel to argue about whether the move has gone too far or not far enough. On the surface, the headline was clear. Cloud revenue reached €6.7b and non IFRS operating profit moved above €3b, while current cloud backlog climbed to €24.1b.

In the short term, the price already reflects high expectations. Over a longer horizon, the focus is on how that cloud and artificial intelligence driven backlog aligns with a 30.9x P/E and a discounted cash flow value almost €100 higher than today’s quote.

Love SAP's growing cloud backlog but concerned that a 30.9x P/E and a quoted value far below the discounted cash flow estimate may be asking a lot from future execution? Compare that setup with our curated list of high quality companies on the 196 high quality undervalued stocks.

Q3 2026 Earnings Summary

• Revenue (Q3 2026 vs. Q3 2025): €10,270m vs. €9,076m (up about 13.2%)
• Net Income (Excl. Extra Items, Q3 2026 vs. Q3 2025): €2,249m vs. €2,004m (up about 12.2%)
• Basic EPS (Q3 2026 vs. Q3 2025): €1.96 vs. €1.72 (up about 13.9%)
• Trailing 12 Month Revenue (Q3 2026 TTM vs. Q3 2025 TTM): €39,387m vs. €36,494m (up about 7.9%)

Earnings grab attention, but investors who care about what a business is actually worth tend to focus on the cash coming in and out of the company over time. Looking at SAP's cash flows and the assumptions behind its discounted cash flow model, the stock could be a whopping 31% undervalued.

SAP AI usage thesis meets early adoption test

Bulls argue SAP can turn agentic AI interest into a fresh usage layer that rides on top of Cloud ERP.

"The planned rollout of around 50 assistants by the end of Q3 2026 and more than 400 Autonomous Suite agents by year end, combined with oversubscribed beta programs for the Business AI platform and Joule Work, gives SAP an opportunity to introduce a new usage based layer on top of existing subscriptions that could add incremental cloud revenue beyond current contract value assumptions."

Q3 shows pieces of that thesis in motion. Cloud revenue reached €6.7b and current cloud backlog is €24.1b, with management crediting Business AI and Autonomous Enterprise wins. The oversubscribed betas now show up as broad AI attachment in large deals rather than just marketing slides.

Bear case on AI costs and dilution faces margin test

Sceptics focus on whether the new AI stack erodes profitability even as usage grows.

"AI related token costs, sovereignty environments and test environment spending have already weighed on SAP’s cloud gross margin. If AI usage grows faster than SAP can optimise model choice and pricing, the extra consumption could compress cloud gross margin and limit the uplift to net margins and earnings that the bullish case assumes."

Cloud gross margin sits around 74%, which is about 0.7 percentage points lower year on year, so the margin squeeze is visible. Yet non IFRS operating profit is above €3b and up 18%, and guidance for operating profit and free cash flow is reaffirmed, so cost pressure is not yet overwhelming earnings progress.

One Narrative has put a figure on that disagreement. → See the Narrative with its higher Fair Value, assumptions and all.

Hunt For Mispriced Cash Flows

SAP just showed that a rich valuation can depend on precise execution outcomes. The real opportunity sits in finding stocks that could be undervalued before the market corrects them.

• Company 1 - 47% below our estimate - supplies steel reinforcement products into infrastructure projects as federal funding channels demand toward higher value mesh solutions.
• Company 2 - 23% below our estimate - sells cube-based robotic storage systems as space constrained warehouses adopt higher density automation and expand software and service contracts.
• Company 3 - 46% below our estimate - expands a deposit rich regional bank by integrating an acquisition that adds an asset sensitive balance sheet and broader lending and fee income.

That is three of the list. See all 196 potentially undervalued companies →

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