Bull vs Bear: Sage Group shares

At the Fool, we believe that considering a diverse range of insights makes us better investors. Here, two contributors debate Sage Group shares.

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Today, the long-term investing case for The Sage Group (LSE:SGE) shares is put under the microscope by two Fools with opposing stances…

Bullish: Christopher Ruane 

Investors often bemoan the lack of British tech success stories. But I think Sage fits the bill.

It focusses on a dull but resilient business sector, with clients that have sizeable budgets. Sage’s software aids customers’ business performance. It therefore offers a clear value proposition. Once installed, clients incur a cost in time and effort if they switch to an alternative. That gives Sage pricing power.

Last year, revenues rose 5% to £1.9bn. The consistently profitable software provider reported profit after tax of £260m.

The shares currently trade on a price-to-earnings (P/E) ratio of 32. That is higher than I normally like, admittedly. But I think the firm’s robust performance and strong revenue growth from its Sage Business Cloud product line point to the opportunity for future earnings growth. As a long-term investor, if I had spare money to invest today, I would be happy to buy Sage shares for my portfolio and hold them.

Created with Highcharts 11.4.3Sage Group Plc PriceZoom1M3M6MYTD1Y5Y10YALLwww.fool.co.uk

Bearish: James McCombie

Sage increased its revenues from £1.85bn in 2018 to £1.95bn in 2022. That is a meagre 1.32% growth per year, yet the stock trades at a P/E ratio of 32. That kind of valuation must assume a high-growth future, but I am not sure where it will come from. 

The company has nearly finished making its software completely subscription access and cloud-based. This has been going on for years and so far has not significantly impacted the top or bottom line: earnings per share declined from 0.27p in 2018 to 0.25p in 2022. 

Sage is increasing its marketing budget, particularly towards small businesses. But I worry that they might view bells-and-whistles accounting and payroll software as convenient rather than essential. I fear that rampant growth will not materialise, putting pressure on the share price, and lifting the dividend yield from its 2.2% level.  

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.

Christopher Ruane does not own shares in Sage. James J. McCombie does not own shares in Sage 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.

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