Why did tech stocks crash in August 2019

Christian Klein only moved to the helm of SAP in October last year. At first he managed the largest software company in Europe together with the American Jennifer Morgan. The 40-year-old has been the sole CEO since she left in April - and is now facing his biggest test to date.

On Monday, early in the morning, Klein explained his new strategy. The night before, SAP surprisingly revised its forecast downwards. Both had consequences: When the stock exchange opened, the SAP share virtually crashed. Investors sold en masse. The paper gave way by more than 20 percent - the biggest price fall in more than 20 years. SAP is not just any company. The DAX company is the most valuable German stock exchange company, on Monday alone an arithmetical value of around 30 billion euros was destroyed by the unprecedented decline in shares.

"I do not sacrifice the success of our customers to optimize our margin in the short term," Klein said on Monday morning. The sentence had consequences: Because the SAP boss, who started as a student trainee in 1999 and then worked his way up, not only lowered the short-term forecast for 2020, but above all also lowered the earnings targets up to 2023. That frightened many investors. "We are at a turning point," emphasized Klein. The Walldorf-based group now wants to use the corona crisis to accelerate the change to a so-called cloud provider and further move away from the traditional software license business, with which SAP has become big and successful. According to CFO Luka Mucic, the group wants to invest a three-digit million amount to improve the range of cloud services. However, this will dampen the margin, which is much noticed on the stock exchange, for the next few years. In the 2019 annual report, the group had announced an annual increase in the operating margin of one percentage point, which was based on the strategy of Bill McDermott, Klein's predecessor at the top of the group.

The changes should pay off by 2023 at the latest, says Klein. Then sales growth should accelerate and the operating result should increase in the double-digit percentage range. In 2025, sales of more than 36 billion euros and an operating profit of more than 11.5 billion euros are expected. The traditional business with software licenses should only play a subordinate role. The share of the cloud business, on the other hand, should be around 85 percent.

Nevertheless, the question remains why, of all things, the share of a large company in the IT industry is falling so sharply? An industry that actually seems to benefit from the corona pandemic, as it accelerates digitization.

"During the Corona crisis, investors pounced on some favorite stocks that they believed were largely immune to the virus," said Frank Rothauge, technology analyst at AHP Capital Management. Technology stocks in particular boomed in the months that followed after the March slump. Behind this was the expectation that software, internet and social media companies could even benefit from the Corona crisis - unlike retail, aviation or the automotive industry - because the economy has to increasingly digitize itself.

SAP was one of the investors' favorites. The share price rose between March and September from 87 to 142 euros. But now the company has announced that it is also affected by the Corona crisis because many industries are suffering, which in turn are SAP customers. "That caught the investors unexpectedly, so they are falling out of the clouds and selling the stock almost in panic," says analyst Rothauge. He gives examples of why SAP is also suffering from Corona: Many companies are actually planning to switch to the new SAP technology S4 Hana. However, many customers did not want to get consultants in-house because of Corona and would therefore postpone projects. Analyst Jochen Stanzl from CMC Markets also sees the collapse of the SAP share as a sign of increasing nervousness on the stock market. "There was too much hope in the stock market, especially in technology stocks," he says. Their prices rose in the summer well above the record levels that existed before the outbreak of the Corona crisis in February.

But at the beginning of September there was a setback on the US technology exchange Nasdaq, since then share prices have struggled to reach their old highs again. Negative news is particularly strong in such a phase. Stanzl points to a fact that he has been observing for a long time: "If the news is only rudimentary, investors throw a share out of the portfolio very quickly and switch to similar papers." The main competitors of SAP are the US companies Oracle, Microsoft and Salesforce.

"Those who are now selling did not understand our model," said an insider. SAP would now invest so that things run better in the future. But apparently this message from Klein, the newcomer to the top of SAP, had not really got through.