SAP Stock is Flying High, But That May Not Last

Does momentum in large-cap tech stocks and “MAGA” have you fearing the worst is near? Those worries may also be further away than investors imagine and encapsulated in European tech giant SAP SE (NYSE:SAP) stock.

Source: Tada Images /

Let’s look at what’s happening off and on the price chart of SAP stock and why, if you’re going to swim in today’s riskier market current, a hedged stock strategy with a good defense first is paramount.

Microsoft (NASDAQ:MSFT). Apple (NASDAQ:AAPL). Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL), a.k.a. Google and Amazon (NASDAQ:AMZN) – the tech giants were collectively hailed as an investible variation of “Make America Great Again” by President Donald Trump immediately in front of Wall Street’s short-lived but crippling coronavirus-driven bear market.

February’s self-congratulating declaration couldn’t have been more ill-timed. Yet each of the tech giants have come roaring back to record highs while forcefully leading the broader markets into positive territory.

In the face of the Covid-19 pandemic, MAGA’s collective technologies have literally and figuratively come to the rescue of both businesses and individuals amid lockdowns, work-from-home trends and social distancing mandates. And in tow, their stocks have prospered to the point of being priced for perfection or at least a good old-fashioned correction. But they’re not alone either.

Across-the-pond Europe’s largest tech outfit, German-based enterprise software and business analytics giant SAP has also reaped the benefits of Covid-19. Among other things, customers have relied on SAP’s products to reconfigure supply chains amid disruptions and permanent dislocations tied to the pandemic. SAP even partnered with Deutsche Telekom (OTCMKTS:DTEGY) and built a contract tracing app for the coronavirus.

It appears SAP is helping on many fronts amid the Covid outbreak. And late July’s top and bottom-line beat offered evidence of SAP’s growing influence. As well, the company’s valuation of nearly $200 billion is a testament to SAP’s worth. To be fair, admittance into the trillion-dollar club isn’t a concern. Still, the commitment by investors is obvious. And much like its U.S. counterparts, SAP is also historically rich.

Look at the price-earnings ratio, the cash flow relative to price and the sales relative to its stock price. The metrics point at an expensive stock. SAP may not be priced for perfection, but shares are without question, optimistically bid.

Sure, the argument could be made SAP is less expensive based on select financial ratios than MAGA stocks. But reaching for relative value across-the-pond after a record-breaking and increasingly rich, momentum-driven rally whose tendrils also stretch across-the-pond is a tough sell.

SAP Stock Monthly Price Chart

SAP SE (SAP) technically stretched overbought situation ripe for correction
Source: Charts by TradingView

What might not be a tough sell are shares of SAP. I’m not warning SAP is an outright short. Still, terribly like MAGA stocks, SAP has benefited from the coronavirus, loose global monetary policies and increasingly popular momentum investing by hitting multiple all-time highs since June. It’s a concern. And right now, this price action carries with it, increased downside risk.

SAP’s riskier ‘V’-shaped price action has taken the stock outside its upper Bollinger Band for a third straight month. It’s extreme. The last incident where SAP traded through this indicator’s resistance for a handful of months was in 2011. That convinced bullish behavior preceded a multi-month bear market correction of about 30% before the uptrend eventually resumed. As well and not helping matters, shares simultaneously jumped above a long-term resistance line.

The trillion-dollar question for SAP stock is whether history will repeat? There are no guarantees it will. But I wouldn’t turn a blind eye to today’s risks, especially given September’s perennially weak tendencies and not to mention October’s famously bearish episodes.

If investors are still looking to brave today’s market waters, I’d advise using an adaptable, limited and reduced risk stock collar strategy. Thursday’s decline of about 4% might look like a great deal, but corrections of 15% to 20% are common for stocks of SAP’s caliber during weaker market cycles.

The Bottom Line For SAP Stock

Giving up a bit of upside potential for the right to maintain a bulletproof defense may not be as popular as momentum investing these days. But in the event this time isn’t any different, it’s no contest which investor will come out on top.

On the date of publication, Chris Tyler did not hold, directly or indirectly, positions in any of the securities mentioned in this article.

Chris Tyler is a former floor-based, derivatives market maker on the American and Pacific exchanges. The information offered is based on his professional experience but strictly intended for educational purposes only. Any use of this information is 100%  the responsibility of the individual. For additional market insights and related musings, follow Chris on Twitter @Options_CAT and StockTwits.

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