There’s something of a trend around legacy software firms and their soaring valuations: Companies founded in dinosaur times are on a tear, evidenced this week with SAP‘s shares topping $200 for the first time.

Founded in 1972, SAP’s valuation currently sits at an all-time high of $234 billion. The Germany-based enterprise software provider was valued at $92 billion two years ago, and $156 billion 12 months back, meaning its market cap has grown more than 50% in the past year alone.

Market valuations shouldn’t be conflated with company health, but it’s a useful indicator of how a company is doing — whether that’s through actual financial performance or meaningful moves it’s making to shift with the times.

Old SAP

CEO Christian Klein has overseen SAP’s turnaround since 2020, focusing on helping customers transition to the cloud while striking useful partnerships with hyperscalers such as Google and Nvidia along the way.

SAP’s rapid rise can partly be attributed to this transition from an old-school license model, with its Q1 2024 report revealing year-on-year cloud revenue growth of 24%, a figure it said it expects to rise further in the next 12 months due to its “cloud backlog” income in the pipeline. Injecting “business AI” across its cloud suite is also playing a part in this trajectory.

Reports emerged last year that its on-premises customers had become disgruntled with how SAP was putting its new technology into its cloud products only. But rather than pandering, SAP’s doubling down on its push to bring them to the cloud, offering its on-prem customers discounts to make the transition — an AI carrot on a cloud stick, if you will.

Investment management company Ave Maria World Equity Fund recently highlighted SAP as one of its top three performers in Q1 2024, noting SAP’s transition “from a perpetual license model to a SaaS model” will create a larger total addressable market (TAM) and greater margins.

And it’s such efforts that are driving the fortunes of SAP and similar legacy software companies, according to Gartner chief forecaster John-David Lovelock.

“There are a few tailwinds aiding growth — preferences for cloud over on-premises systems, upgrades and expansion requirements,” Lovelock told TechCrunch. “But the primary effect is simply digital business transformation efforts that started in 2021 are ongoing.”

Hist-Oracle

And what about Oracle, the U.S. database and cloud infrastructure company founded in 1977? Oracle is valued at more than $385 billion as of this week, 20% up on last year, though this figure was at almost $400 billion a couple of weeks back — far and away its highest ever valuation.

The reasons for this are roughly comparable to that of SAP: “AI-fueled cloud growth,” the result of a long transition away from an on-premises model.

Notably, Oracle’s fiscal 2024 Q3 earnings saw the company pass a key milestone, with its total cloud revenue — that’s SaaS (software-as-a-service) plus IaaS (infrastructure-as-a-service) — surpassing its total license support revenue for the first time.

“We have crossed over,” Oracle CEO Safra Catz said on the earnings call.

At its Q4 earnings, Oracle reported modest revenue growth of 3% — but this figure increased to 20% for cloud-specific revenue. And more is to come, says Catz, projecting double-digit cloud revenue growth in the coming financial year. This has been aided by partnerships with the likes of Microsoft, Google, and generative AI darling OpenAI, which are seeking all the cloud infrastructure they can get — OpenAI plans to use Oracle’s cloud to train ChatGPT.

“In Q3 and Q4, Oracle signed the largest sales contracts in our history — driven by enormous demand for training AI large language models in the Oracle Cloud,” Catz said.

As with SAP, Oracle also recently inked a deal with Nvidia to help governments and enterprises run “AI factories” locally using Oracle’s distributed computing infrastructure.

It’s not all a rosy outlook, though: One of Oracle’s flagship customers, TikTok, is facing a ban in the U.S., with Oracle warning this week that this could affect its revenues in the future.

Big Blue eyes return

IBM, the company founded in 1911 as Computing-Tabulating-Recording Company, reached an 11-year high in March of $180 billion, just 6% off an all-time record.

The company’s valuation has fallen around 14% since then to under $160 billion, but it remains 30% up on last year.

IBM was once a hardware company, with mainframes and PCs the order of the day, but “Big Blue” segued into a software and services company, which now makes up most of its revenue. IBM spun out its legacy infrastructure services business as a stand-alone entity called Kyndryl in 2021.

IBM began its cloud journey in 2007 with Blue Cloud, continuing through the years with the launch of IBM Cloud and through milestone megabucks acquisitions such as Red Hat. In tandem, IBM has also pushed AI front and center, starting with IBM Watson and more recently a slew of AI services to support AI demand in the enterprise — this included the launch of Watsonx, which helps companies train, tweak, and deploy AI models.

“Client demand for AI is accelerating, and our book of business for Watsonx and generative AI roughly doubled from the third to the fourth quarter,” IBM chairman and CEO Arvind Krishna said at its Q4 2023 earnings in January.

IBM’s recent financials have been something of a mixed bag, with its Q1 2024 numbers showing a small revenue hike that missed analyst estimates and earnings that beat estimates. On the other hand, its consulting revenue fell slightly.

However, two months on, analysts are bullish about IBM’s path, with Goldman Sachs this week giving IBM a “buy” rating off the back of its AI investments and continued focus on infrastructure software.

“We believe that IBM is in the middle innings of pivoting its portfolio to a suite of modernized application and infrastructure software and a broader array of services, away from a legacy-focused portfolio,” Goldman Sachs’ analyst James Schneider said.

It’s too early to say how this sentiment will age, but IBM’s AI investments are paying dividends as far as Wall Street is concerned.

Legacy-building

SAP, Oracle, and IBM aren’t the only legacy software companies enjoying fruitful times. Intuit, a 41-year-old financial software company, hit the giddy heights of $187 billion last month, just a fraction below its Pandemic-era high of $196 billion. As with others, Intuit has been investing heavily in AI as part of its push to remain relevant, and this is the first thing it talks about at its earnings calls.

And Adobe, founded in 1982, is also doing pretty well, with its valuation up 8% year-on-year to $236 billion — Adobe reported record Q1 and Q2 revenues with AI and cloud touted as pivotal to this growth.

Microsoft is the world’s most valuable company, a $3.3 trillion juggernaut whose shares have surged 33% in the past year. A decade in the hot seat, Satya Nadella has transformed Microsoft into a cloud-first, AI-first colossal company, having lost out on the smartphone gold rush due to prior missteps.

Microsoft turns 50 next year, and staying relevant after so many industrial, technological, political, and managerial shifts isn’t easy. But Microsoft hasn’t just remained relevant — its revenues, profits, and just about every other metric continue to surge, due to its investments in the cloud and, more recently, generative AI.

While these companies are definitely benefiting from embracing new trends, there are other factors at play as well — in particular, investors don’t have many places to park their money to make bets on new technology.

Ray Wang, founder and principal analyst at Constellation Research, believes the decrease of competition in certain markets has helped drive investors toward the biggies.

“There’s minimal competition as we are in oligopolies and duopolies,” Wang told TechCrunch. “We used to have hundreds of software companies, but decades of mergers and acquisitions have whittled down the options to a few companies in every geography, category, market size, and industry.”

Wang also pointed to the stagnant IPO market, as well as the impact of the private equity sphere, as reasons why legacy technology companies are doing well.

“COVID killed the IPO market — we don’t have the startups of the past that can grow to become the next Oracle, SAP, or Salesforce. The pipe has been bad despite the number of software companies being started — they have not gotten to scale,” Wang said. “[And] a lot of the acquisitions by the PE firms have destroyed the spirt of entrepreneurship and [have] turned these companies into financial robots.”

There are many ways to slice and dice all this, but well-established software firms are ultimately better positioned to thrive when a game-changing technology such as AI comes along, owing to the fact they have a market presence and stable customer base.

Their respective cloud transitions are also a big part of the narrative, tying in neatly with the rise of AI, which is heavily dependent on the cloud.

They also have significant resources at their disposal, with strategic acquisitions playing a major part in their push to stay relevant: IBM is bolstering its hybrid cloud ambitions with its recent $6.4 billion bid for HashiCorp, while SAP revealed plans to pay $1.5 billion for AI-infused digital adoption platform WalkMe.

AI might be having a minimal impact on companies’ bottom line today, but it’s a must-have as far as Wall Street is concerned: Alphabet, Amazon, and Microsoft have all hit record highs of late, and AI is a major part of it. Apple’s shares also hit an all-time high off the back of its recent AI announcements, even though “Apple Intelligence” isn’t available yet.

The AI tide might be lifting all boats at present, but Gartner’s famed “hype cycle” prophesizes that interest in new technology wanes as all the early experiments and implementations fail to deliver on their promise — this is what it calls a “trough of disillusionment.” This could be coming, according to Lovelock, meaning many of those billion-dollar generative AI startups could have something to worry about.

“It’s easy to get lost in new and emerging software markets,” Lovelock said. “It is also hard to compete for attention when new AI companies are boasting multi-billion dollars of revenue within a few years of launch. However, traditional software markets have a combined annual revenue over $1 trillion in 2024 — legacy software sales are growing strongly, and AI’s strong growth has obfuscated this fact for many.”

Businesses that have been around for decades are better positioned to flourish due to their existing foothold. We might be in an AI bubble, but when mainstream adoption truly takes off, the SAPs, Oracles, and IBMs of the world will be better positioned to jump on it.