Legacy software companies like SAP, Oracle, and IBM are experiencing soaring valuations and record-high market caps. These companies, founded decades ago, have successfully transitioned to cloud-based models, fueling their growth and attracting investors. SAP, for example, has seen its valuation increase by over 50% in the past year alone. CEO Christian Klein has focused on helping customers move to the cloud and forming partnerships with major players like Google and Nvidia. SAP’s shift to the cloud has resulted in significant revenue growth, driven by its cloud backlog income and the integration of “business AI” across its suite of cloud products.
Similarly, Oracle has experienced significant growth due to its transition away from an on-premises model and its embrace of AI-fueled cloud services. Oracle’s total cloud revenue surpassed its total license support revenue for the first time in Q3 2024. The company expects double-digit cloud revenue growth in the coming year, fueled by partnerships with Microsoft, Google, and OpenAI. Oracle’s investments in AI and cloud infrastructure have positioned it as a leading provider for training large language models.
IBM, a company with a long history dating back to 1911, has also seen its valuation rise. While IBM’s recent financials have been mixed, analysts are optimistic about its future due to its focus on AI investments and infrastructure software. IBM’s pivot to a modernized portfolio has attracted positive attention from investors.
These legacy software companies are not the only ones benefiting from their embrace of new technologies. Intuit, a financial software company founded in 1982, and Adobe, founded in 1982, have also seen their valuations increase thanks to their investments in AI and cloud technologies. Microsoft, the world’s most valuable company, has transformed itself into a cloud-first and AI-first company under the leadership of Satya Nadella.
Several factors contribute to the success of these legacy software companies. The decrease in competition in certain markets has led investors to focus on these established companies. The IPO market has been stagnant, and private equity acquisitions have limited the growth of new startups. Additionally, the cloud transition of these companies and their strategic acquisitions have contributed to their success.
While AI is currently having a minimal impact on these companies’ bottom lines, it is essential for Wall Street’s perception of their value. The rise of AI has driven record-high valuations for companies like Alphabet, Amazon, and Microsoft. However, Gartner predicts a “trough of disillusionment” as interest in AI wanes when early implementations fail to deliver on their promises. Legacy software companies are better positioned to weather this downturn due to their existing market presence and customer base.
In conclusion, legacy software companies like SAP, Oracle, and IBM are thriving due to their successful transitions to cloud-based models and investments in AI. Their valuations have soared, attracting investors who see the potential for future growth. While there may be challenges ahead, these companies’ established foothold in the industry positions them well to capitalize on the mainstream adoption of AI in the future.
