The Sage Group (LSE: SGE) share price has soared 80% in the past five years, with the bulk of that coming in the last 12 months.
Sage describes itself as “a leader in accounting, financial, HR and payroll technology for small and mid-sized businesses.“
And a look at its latest trading update shows just why growth stock investors like it so much.
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Strong three months
For the first quarter of its financial year, to 31 December 2023, Sage posted a 10% rise in revenue. It’s global too, with gains in all regions.
North America claimed nearly half the total revenue, and showed the biggest rise at 13%. The US market is very competitive, so that says a lot to me.
I’m also impressed to see Sage’s cloud-based offerings making up 79% of all revenue.
AI here too
CFO Jonathan Howell said: “Small and mid-sized businesses are continuing to digitalise despite the ongoing macroeconomic uncertainty, and through our trusted cloud solutions and innovative, AI-powered services we are well positioned to support them.”
Hmm, AI, Artifical Intelligence. Excuse me if I twitch a bit.
I won’t knock AI, as it’s surely capable of some impressive things. But it looks to me as if a lot of investors have been jumping on anything to do with AI, perhaps a bit indiscriminately.
And I do wonder how much AI can really do for such formulaic and rules-based things as accounting and financial software.
Outlook
At FY time in November, Sage said organic revenue growth in 2024 should continue at 2023’s pace. It also expects margins to improve. This guidance remains the same at the Q1 stage this year.
It suggests solid growth, and we could be in for another great year. But I question whether it’s really enough to justify the high Sage share price right now, and the valuation it represents.
Billionaire investor Warren Buffett famously said: “It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.”
I do think Sage is a wonderful company, but I’m not so sure about the fair price part of it.
Valuation
Broker forecasts put Sage on a price-to-earnings (P/E) ratio of 36 for the current year, more than three times FTSE 100‘s average right now.
After three more years of predicted earnings growth, that would drop to around 27 by 2026. Now, top growth stocks often command such high ratings. But this makes me a bit nervous.
It’s not like there are any decent dividends to speak of, with a yield of only 1.7% on the cards.
Bottom line
So what’s my take on it? I’ve underestimated top growth stocks many times in the past. And I could well be wrong about what Sage shares might do this year.
But the fear of an AI bandwagon keeps nagging at me, and I’d like to see how that goes with the 2024 crowd.
For me, it’s a great company, and one I might buy if we see future share price dips.
