There aren’t nearly as many tech companies listed in the UK as there are in the US. So an investor looking for UK tech shares to buy now doesn’t have a big choice.
One popular UK tech stock, accounting software firm Sage (LSE: SGE), has seen its share price increase more than 40% over the past year, at I write. I’m not surprised by that. Back in July, I explained why I would consider investing £1,000 in Sage. If I had done so the day that article was published, my stake would now be worth £1,175.
But would I still invest today, given the steep increase we’ve already seen in the Sage share price?
Why I like Sage
I continue to like the economic characteristics of Sage’s business.
It supplies accounting software to small and medium-sized firms. Many such businesses are fairly reliable customers. They are required to keep books from one year to the next. Having set up a piece of software to help them do so and trained staff on it, there would be switching costs and other inconveniences if they moved to a different supplier. That gives a company such as Sage pricing power. In other words, it is able to keep raising its prices over time. That can help support profit margins even in the face of inflation.
I also like the company’s focus on small and medium-sized enterprises. Many software firms focus on large customers like multinational firms. Sage’s focus allows it to develop the right solutions for a user group that has budget to spend on this type of software but doesn’t always feel valued by tech giants.
Is the Sage share price undervalued?
Just liking a company doesn’t mean that I would buy its shares, though. Whether or not I would purchase Sage for my portfolio depends on its valuation.
After its recent rise, the Sage share price is trading close to the levels at which it peaked in 2018 and again in 2019. The only time in its history it’s traded substantially above its current level was over 20 years ago in the dotcom boom.
The current price-to-earnings ratio for Sage is in the 30s. That means that if I bought the shares today it would take over 30 years for the earnings per share to add up to the current purchase price (if the firm’s earnings stayed static throughout that period). Like their American counterparts, UK tech shares often trade at a high P/E ratio. But Sage is not a start-up business with dynamic growth prospects. It is a well-established, profitable B2B supplier with decent but modest growth prospects. Earnings per share this year, for example, were actually lower than three years ago.
In the absence of a compelling new growth story, I do not see Sage shares as undervalued at present.
My next move
On top of that, there are some risks with Sage. A broad-based tech sell-off could drag down the share price. A move to cloud computing has added costs at the company and dissatisfied some customers too. That could hurt profit margins in the short term.
So although I like the Sage business, I would not add its shares to my portfolio at the moment.
