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Comparing The 2016 Market Performances Of Sap Se's And Pegasystems Incorporated

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Market Overview

Executive Summary (Introduction):

This research paper will attempt to add insight and summation in regards to 2016’s stock market generally, and, more specifically, how two representative firms have performed within the market. Only the equities market will be discussed here, not bond or derivative markets (unless framed in relation to equity market performance). Additionally, this report will primarily concern itself with the performance of the domestic, or U.S., stock market, and largely leave aside global equities markets (global equities markets may be discussed as they pertain to the U.S. stock market, however). The two firms to be discussed here will both be computer software tech firms (for comparative value), in different sectors. They are SAP SE, a large cap firm, and a relatively small cap firm, Pegasystems, Incorporated. The summary analysis of these firms will directly precede the broader market overview, and the report will sum with a concluding analysis of the how these tech stocks fit within the market and what they mean in today’s market.

2016 Market Performance to Date:

At the beginning of 2016, the U.S. stock market was performing poorly enough that many analysts were calling for a bear market, with some warnings of another recession. According to Quora, the U.S. stock market’s performance at the beginning of the year was the worst in 119 years, with the Dow Jones shrinking by more than 5%, while the S&P 500 fell by nearly the same amount, 4.9%. Likewise, per the report, Index MSCI World showed the global equities market falling by even more, 5.2 %. Quora’s comprehensive report does indicate some factors responsible for this, quickly summarized below:

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  • China’s gross domestic product growth decelerated, hindering the rest of the global market, including the U.S.’s. China additionally weakened its own currency, further signaling to the rest of the world China’s economic struggles.
  • China’s stock market, its Shanghai Composite Index, and its foreign exchange reserves all suffered individually, further harming both U.S. and global markets.
  • Declining global oil prices, which put some U.S. oil companies near insolvency. (Shirokorad, 2016)

Despite these initial indicators of a recession and bear market, the stock market has picked up and performed beyond investor expectations in the ensuing time period. A report from CNN Money indicated that the stock market had hit its highest level in 2016 yet as of March 30th, before confirming that the Dow had made up its losses and was up 1.7% at the time. Despite the gains at this roughly halfway point to where we are now, the report did foreshadow a potential problem in the market at the time: corporate earnings. (Long, 2016). Despite some changes in volatility regarding stock prices and bold yields not moving in the same direction as often (signaling a potential market shock, to be discussed momentarily) being reported by the Wall Street Journal (Mackintosh, 2016), The Wall Street Journal also reported that same day that U.S. stocks had halted their earlier losses and are now edging higher, buoyed by gains in telecommunications and utilities stocks (Bird, Huang 2016). Summarily, the stock market has seen a roughly upward trend since its low at the beginning of the year, despite some uncertainties in the market. Please see the Appendix at the end of this report for a summary graph1 charting the S&P 500 Index’s general upward trend from September 1st of 2015 up until recently, September 1st of 2016. (MarketWatch, 2016)

The market expectations for the stock market going ahead skew toward a bear market, given many variables. As mentioned before, the fact that stocks and bonds are moving up or down together could be a sign of “deep discontent in the market,” according to The Wall Street Journal, as stocks and bonds appear to be forming an inverse pattern of price movement. As they move up or down together, this could signal that the market is about to receive a shock. (Mackintosh, 2016)

With this setting the tone for the latter portion of 2016, the market does look poised for a downturn, forming what would essentially be a bell curve for the year. Drawing from a late August report from Barron’s regarding some analysts’ expectations for the market moving forward, it appears that the number of factors leading to uncertainty in the market is what would likely cause a decline. According to that report, problematic contractions within manufacturing is one of the causes increasing uncertainty in the market, as the analysis states: “The Institute for Supply Management Manufacturing Index slipped into contractionary territory in August, with the top-line index falling to 49.4%, down much further than our below-consensus forecast of 51.9%.” (Farrell, 2016)

Further exacerbating uncertainties and the likelihood of a more bearish market is the fact that we are currently in a presidential election, which historically has tended to increase volatility in the market against the prospect of a new president and possibly new policy. Kevin Mahn, of Forbes, lends credence to the idea that this election cycle will be no different, saying “…the outcome of this presidential election, in addition to many of the concurrent congressional races, will have a large impact on taxes, health care, immigration policies and federal regulations for months and years to come.” (Mahn, 2016) Attached to this report’s Appendix is a graph sourced directly from Forbes, projecting different stock market outcomes based upon different political outcomes. According to the graph, the best political outcome for the stock market historically and on average has been a Democratic president and a Republican-controlled congress.2 (Mahn, 2016). Given that many media outlets are projecting a Democratically-controlled Senate (at the least), it may be reasonable to think that this will further contribute to a more bearish market.

To further reify the projections for the stock market in 2016, we can turn to Fortune’s Goldman Sachs’ prediction for the stock market for the rest of the year. In June, an analyst team from Goldman Sachs anticipated “flat” six-month returns of 0.1%, which, while not recessionary by any measure, would still be a disappointment to investors after former stock market highs. Additionally, the analysts’ expectation for the whole year is a return of 2.74%, substantially below the S&P’s 10-year average of 7.25%. (Lucinda Shen)

Finally, CNBC’s September 1st market report even further indicates weakness in the markets, stating “The Dow Jones industrial average closed about 15 points higher, after briefly falling more than 100 points. The S&P 500 fell less than a point, after being dragged by a 1 percent fall in financials. Utilities were the greatest laggards at the close. The Nasdaq composite outperformed, gaining about 0.3 percent.” (Imbert, 2016) These weak performances help us to verify a generally downward trend going forward from the highs earlier in 2016. The stock market now appears to either be continuing to underperform or is plateauing, in line with this report’s conceptualization of a rough bell curve for the year in terms of stock market performance, bookending the year with low points.

Firm Analysis:

SAP SE (Firm 1):

Given the current usage of tech firms’ performance as an important barometer of stock market health (similar to utilities or oil), two tech firms will now be analyzed in relation to the larger market. The first firm, SAP SE (Systemanalyse und Programmentwicklung, or Systems, Applications & Products in Data Processing) is an enterprise software firm (NYSE: SAP) with global services and operations. Founded in 1972, SAP SE has continued to innovate in business systems processes, ultimately helping to bring big data access and cloud computing to the forefront of software development. (SAP.com, 2016) They exist within the broader application software industry, and specifically within the enterprise software sector.

The industry/sector that SAP SE is a part of is enterprise software, which comprises or overlaps (or is at least related) with business intelligence software, supply chain management software, and customer relationship management software. The industry is highly concentrated into a few large global players. While these firms compete in some senses, they tend to offer differentiated products (e.g., SAP SE offers enterprise software, and does not strictly specialize in customer relationship management software). Firms in this industry tend to have heavy research and development costs, and increased competition in this industry has led to increased marketing expenditures, as new technologies like the cloud have reduced margins. (Shields, 2014)

The performance of this industry and sector has been marked by moderately increasing revenue, including in 2016. Graph 3, sourced from Market Realist, in the Appendix shows that revenues maintained their increases this year over last.3 (Shields, 2014). The graph’s blue line indicates SAP SE’s sector, enterprise software, one of the higher-revenue sectors in the computer software industry. The industry, and particularly SAP SE’s sector, is expected to continue its growth throughout 2016, as demonstrated in this report’s Appendix’s Graph 4, again sourced from Market Realist.3 (Shields, 2014).

According to the technology website Apps Run the World, the following are the biggest players in the enterprise resource/computer software applications industry (Pang, 2016):

  • Microsoft.
  • Oracle.
  • IBM.
  • EMC.
  • Amazon.
  • Salesforce.com.
  • Adobe.
  • Dassault.
  • As mentioned previously, SAP SE’s geographic presence is global and transnational, as they have operations in well over 100 companies, and their product offerings include primarily enterprise software.

    Recently, SAP SE’s revenues have been steadily climbing as the result of a growth strategy that emphasizes innovating into new technologies—in this case, cloud technologies. Directly from SAP SE’s website, they clearly outline their recent performance: “In 2015, SAP saw exceptional growth in its cloud business. Its core on-premise license business performed strongly as well, growing 10%. With the strong top line result we generated the highest non-IFRS operating profit in SAP’s history.” (SAP.com, 2016) Notably, total revenue also climbed 18% from 2014 to 2015, due in large part to their growth strategy involving the development of and investment in emerging technologies. (SAP.com, 2016)

    Pegasystems Incorporated (Firm 2):

    Pegasystems Incorporated (NASDAQ: PEGA) is another computer software company based in Cambridge, Massachusetts. Unlike SAP SE, they are considered a small cap company and differ in their sector, providing primarily customer relationship management (CRM) software as opposed to enterprise resource planning (ERP) software. Founded in 1983, Pegasystems started out offering business processing solutions before eventually branching out into customer relationship management software in the 2000s. Recently, they became the only unified system for case and decision management. (Pegasystems.com, 2016) Like SAP SE, they similarly serve a worldwide geographic area.

    Because this report has discussed much of the broader industry that Pegasystems resides in, retreading prior information will be refrained from. Sector performance, however, is still relevant, and in terms of customer relationship management software, as of yet undiscussed. Customer relationship management software, contrasted with enterprise software, is any application that allows businesses to manage and handle customer and client relationships and interactions, as well as the corresponding data, offering the firm important analytics. (Burnham, 2013) Again referencing Graph 3 in the Appendix, customer relationship management software has performed well throughout 2016, ultimately topping enterprise software in terms of overall revenue as a sector.3 (Shields, 2014).

    Per a 2013 Forbes analysis, the sector is poised to grow substantially by 2017, stating “The latest enterprise software forecast from Gartner shows Customer Relationship Management (CRM) increasing to a $36.5B worldwide market by 2017, a significant increase from the $20.6B forecasted in Q1 of this year.” (Columbus, 2013) This is in line with the steady growth of its parent industry, computer software applications.

    Some of the products offered by Pegasystems are listed below (Pegasystems.com):

    Customer Relationship Management Applications:

    • Marketing.
    • Sales and Onboarding.
    • Customer Service.
    • Customer Decision Hub.
    • Filed Service.
    • Co-Browse.

    Platform Applications:

    • Operations.
    • Pega Cloud.
    • Pega Mobility.

    Below are the other companies or products within Pegasystems’ sector specifically, as the major players themselves in the industry have already been mentioned (Softwareadvice.com, 2016):

    • Microsoft Dynamics CRM.
    • Zoho CRM.
    • Netsuite CRM.
    • Infusionsoft CRM.
    • Pipedrive CRM.
      • Pegasystems’ performance in 2016 has been solid but not stellar. Its growth strategy is fairly similar to that of SAP SE’s. In order to keep up its current growth, it has expanded into cloud technologies and other innovations, which has allowed it to keep growing its revenues. Its year over year revenue growth in 2016 was 16%, while its cloud revenue specifically rose by 55%, highlighting its growth strategy. Due to some of the market uncertainties mentioned earlier in this report, Pegasystems’ forecast for the future remains solid if unspectacular. (Kalogeropoulos, 2016)

        Conclusion:

        After having analyzed both the stock market’s currently increasing uncertainty and the background and performance of two public tech firms in the software industry, it would not be unreasonable to affirm the role tech firms play in affecting the entire stock market, just as any other major industry does. Perhaps more importantly, tech firms, even smaller ones, seem at least modestly resilient to both increasing market uncertainty and outright declines in the market relative to many other industries and sectors. This throws into question the idea that tech stocks may have lost some or much of their attractiveness, and while these types of companies may not reach the highs they did over a decade ago for a long time, they are still worth considering as investment options alongside indices historically seen as conservative investments, and continue to act as important measures of the stock market, or as contrasts against it.

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