Should I buy Sage Group shares for my UK tech portfolio?

Tech stocks are in favour across the globe. Royston Roche takes a deeper look into The Sage Group shares following its trading update.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

The Sage Group (LSE: SGE) shares fell 20% in the past year. However, the company’s shares rose 5% on January 21st after it released its first-quarter fiscal year 2021 trading update.

Sage Group shares’ recent trading update

Sage Group’s revenue grew by 1.4% year-on-year to £447m. It was primarily helped by the 4.7% growth in recurring revenue to £408m. Other revenue fell 24% to £39m. In my view, recurring revenue is one of the important metrics while evaluating a tech company, since recurring revenue is the portion of its revenues that is expected to continue in the future.

Recurring revenue growth was supported by software subscription growth of 11% to £303m. Geographically, North America’s recurring revenue grew by 6.4% to £160m. It was driven by a strong performance from Sage Intacct, which is a powerful cloud financial management platform. Northern Europe’s recurring revenue grew by 3.3% to £96m.

In line with the management’s long-term plan to drive growth in recurring revenues, it is increasing investments in the fiscal year 2021 in cloud native solutions. Looking into the recurring revenues, the Future Sage Business Cloud Opportunity grew by 6.2% to £366m, primarily helped by 27% growth in cloud native revenue to £63m.

According to the 2020 annual report, Sage Group shares’ total addressable market (TAM) is estimated to be $33bn in 2021. The TAM comprises over 69 million small and medium businesses. Sage’s TAM is expected to remain broadly stable in 2021 when compared to 2020, due to the decline in the on-premise market, cloud growth is expected to be 6% in 2021 and 11% in 2022. The Cloud share of TAM was $15.7bn in 2020.

The company has a stable balance sheet. It has cash and equivalents of £1.2bn and net debt of £129m.  Its dividend yield is 2.84%, which I consider to be decent considering the prevailing interest rates. In the earnings call, the management said that they would only consider share buybacks when they think it’s appropriate and have expressed their intentions to invest in the business and might do bolt-on-acquisitions where appropriate. In the first quarter, the company made an equity investment in Brightpearl, which is a digital e-commerce and retail platform.

Five-year share price

Investors who have bought the stock and held it in the past five years might be disappointed as the stock is more or less about the same level. However, the share price has fluctuated and rebounded 40% from its low in 2016. Similarly, in 2018, it rose 68% from its low and 54% in 2020 after the sell-off in March.

Sage Group shares are currently trading at a price to earnings ratio of 22.13 when compared to its five-year average of 27.89. Analysts expect the earnings per share to drop to 21p for the fiscal year ended September 2021 from 28p for the fiscal year 2020. I would like to wait and better understand the impact of Covid-19 on small and medium-size businesses before buying the stock.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Royston Roche has no position in any of the shares mentioned. The Motley Fool UK has recommended Sage Group. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Mature Caucasian woman sat at a table with coffee and laptop while making notes on paper
Investing Articles

10% dividend growth! 2 FTSE 100 stocks tipped to supercharge cash payouts

These FTSE 100 stocks have strong records of dividend growth. And they're expected to keep on delivering, as Royston Wild…

Read more »

Investing Articles

Down 17% in a month and yielding 7.39%! Is this FTSE 100 share a screaming buy for me?

When Harvey Jones bought Taylor Wimpey last year he thought this FTSE 100 share was a brilliant long-term buy-and-hold. Has…

Read more »

Investing Articles

Here’s how I’m using a £20k ISA to target £11k+ in income 30 years from now

Is it realistic to put £20k in an ISA now and earn over half that amount every year in passive…

Read more »

Young black colleagues high-fiving each other at work
Investing Articles

If I could only keep 5 UK stocks from my portfolio I’d save these

Harvey Jones is running through his portfolio of top UK stocks to see which ones he couldn't bear to do…

Read more »

Midnight is celebrated along the River Thames in London with a spectacular and colourful firework display.
Investing Articles

I’m aiming for a million buying unexciting shares!

By investing regularly in long-established, proven and even rather dull businesses, this writer plans to aim for a million. Here's…

Read more »

Investing Articles

3 things to consider before you start investing

Our writer draws on his stock market experience to consider a few vital lessons he would use to start investing…

Read more »

Investing Articles

Will this lesser-known £28bn growth stock be joining the FTSE 100 soon?

As the powers that be plan a reorganisation of Footsie listing rules, this massive under-the-radar growth stock could find its…

Read more »

Investing Articles

Fools wouldn’t touch these 5 FTSE 350 flops with a bargepole – how come I own 3 of them?

Harvey Jones took a chance on three struggling FTSE 350 stocks in the hope that they'd stage a dramatic recovery.…

Read more »