On 16 June, I suggested investors might stop staring at the runaway Nvidia share price and consider investing in the artificial intelligence (AI) revolution through a top UK growth stock instead.
One of my choices was FTSE 100-listed accounting software specialist Sage Group (LSE: SGE), whose shares were soaring at the time. They weren’t quite hitting Nvidia levels, but were still up 45.77% in the 12 months prior to writing the article.
Two things held me back from buying them myself. The first was that I feared the AI hype had spun out of control, and the tech sector might be due a reckoning. Things have calmed down, Nvidia is up just 11.77% in the last six months, but there’s been no sell-off.
I missed out here
My second concern was that the Sage share price looked pricey trading at 33.98 times earnings. So I parked it on my watchlist and promptly forgot about it. I spent the subsequent six months filling my portfolio with cheap, high-yield FTSE 100 stocks with price-to-earnings ratios of less than 10 times earnings.
They’ve all done pretty well, I’m happy to report, but not as well as Sage. Its shares have jumped another 34.57% in the six months since I decided they were too expensive for me to buy. And yes, I’m kicking myself. Over 12 months they’re up 56.62%, making this the fourth-best-performing FTSE 100 stock after Rolls-Royce, Marks & Spencer Group and 3i Group.
So much for hindsight. The question now is where Sage shares go in 2024. I was interested to see renowned fund manager Nick Train of the Finsbury Growth & Income Trust singling out Sage for praise recently.
Train has held the stock since 2023, describing it as a core portfolio holding, and saying its recent £350m share buyback plans and “reassuringly strong” double-digit growth were reasons for its ongoing strength and popularity.
He reckons Sage has entered a new phase of growth, providing cloud-delivered software services to small- and mid-cap companies worldwide. It’s also zipping along in the US.
On 22 November, Sage reported underlying full-year 2023 recurring revenue growth of 12% to just over £2bn, with Sage Business Cloud leading the charge up 25% to £1.63bn. Operational efficiencies boosted margins too, as the group scaled operations.
Wrong time to buy?
Statutory operation profits did drop 14% to £315m but this was down to one-off issues such as profitable business disposals in 2022 and merger and acquisition charges. Sage is sitting on £1.3bn of cash and hiked its dividend 5%. The stock yields just 1.64% but this is partly a consequence of its rapid share price growth.
Bank of America was impressed saying “demand remains unabated” and upgrading its price target from 1,150p to 1,300p (Sage trades at 1,176p today). However, Canadian Bank Canaccord Genuity downgraded Sage to ‘sell’ calling the stock’s popularity spike a “compelling” opportunity to take a profit.
I’m wary of buying today at what could be the tail end of a Santa Rally, with the stock trading at 36.4 times earnings. If I see weakness in the new year, I’ll pounce. However, there’s a real danger I’ll be kicking myself for failing to buy Sage this time next year too.
