Trump’s Japan Trade Deal Overshadows SAP and Texas Instruments Earnings
SAP’s cloud and AI comments reaffirm our stance on these two holdings as we're hopeful about the latest tariff breakthrough.
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After setting yet another record high yesterday, the S&P 500 looks to shrug off SAP's SAP quarterly miss and Texas Instruments' TXN beat and reiterate, and instead focus on Pres. Trump’s announced trade deal with Japan. Trump’s announcements yesterday with Indonesia and the Philippines underwhelmed us, but the deal with Japan is a much larger one with a more sizable trading partner. Based on 2023 data, Japan was fifth behind Mexico, China, Canada, and Germany in terms of U.S imports.
We see the deal with Japan as a nice win in part because of the $550 billion fund it establishes for Japan to make investments in the U.S. It also establishes a 15% tariff on imports, which is less than the threatened 25% tariff poised to go into effect on Japan on Aug. 1. Japan will also buy U.S. aircraft, cars, and trucks, boost rice purchases, and buy $8 billion in agricultural and other products, while hiking defense spending with American firms.
The Japan deal also has us cautiously optimistic about trade deals with larger trading partners, including Canada, Mexico, the European Union, and China. Should agreements be reached in the coming weeks, it would help remove some of the uncertainty overhanging the economy and the market, as well as EPS expectations for the back half of the year.
SAP disappointed, but cloud growth was still robust
SAP delivered a top-and-bottom line miss for its June-ending quarter, but cloud revenue was up 24% year over year (28% in constant currencies), which was a bright spot. Also, SAP's cloud ERP suite delivered a 30% gain in revenue. Alongside its reaffirmed 2025 guidance, SAP sees its cloud revenue up 26%-28% in constant currencies, which is backed by its cloud backlog that stood at $21.26 billion exiting the quarter, up 28%.
How does that relate to the Portfolio’s holdings? Pay attention to ServiceNow NOW and Elastic ESTC. On SAP’s earnings call, we took note that over half of its cloud order volume came from deals that include AI use cases. SAP also telegraphed that it sees business AI adoption accelerating further in the second half of 2025 as the number of its AI agents hits 40 compared to 14 in the first half of 2025. Because of favorable pricing relating to AI offerings, as that adoption accelerates, that mix shift toward AI should drive further margin improvement at ServiceNow and Elastic. It also reaffirms our view that Elastic’s outlook issued in late May was conservative.
The Pro Portfolio is long NOW, ESTC.
