The Sage Group (LSE: SGE) share price fell by almost 10% in early trading today (16 May), after the FTSE 100 accounting software group issued its half-year results. They were still down almost as much by mid-day. The sell-off came despite the company reporting a 22% rise in underlying pre-tax profit to £242m.
I’ve been taking a look to find out what might have triggered today’s slump. Do shareholders like me need to be worried, or is this an opportunity for me to buy more shares at a reasonable price?
Good progress so far
Sage is one of the UK’s biggest tech stocks. and its shares have enjoyed a strong run over the last couple of years. Even after today’s drop, the shares are still up by 60% since May 2022.
In recent years, the company has made good progress migrating its customer base to subscription-based online services, away from traditional software.
This is reflected in the group’s half-year results, which show annualised recurring revenue up by 11% to £2,253m. Essentially, almost all of Sage’s revenue now comes from subscriptions of some kind.
Profit margins are improving, too. Today’s half-year results show an underlying operating profit margin of 22%, up from 20.4% during the same period last year.
Why are the shares falling?
The stock market always tries to look forward. I think that’s the explanation for today’s share price slide.
Sage’s customer base is made up of small and medium-sized businesses around the world. This means it’s exposed to economic conditions in the countries where it operates. France and the UK were relatively weak in H1, for example, but North America saw stronger growth.
In his half-year comments, Sage chief executive Steve Hare said that demand for the company’s accounting, HR and payroll solutions “remains robust”.
However, he also warned of “ongoing macroeconomic uncertainty” and said revenue growth for the year to 30 September may only be “broadly in line with the first half”.
The word broadly is often used in company reporting when there’s a risk of a slight miss. I think there’s a possibility that Sage’s growth rate could slow over the coming months.
Is it cheap enough to buy?
As an investor, I like Sage’s combination of recurring revenue and high profit margins. It should provide smooth and predictable cash flows to support capital expenditure and dividend growth.
Sure enough, the interim dividend has been increased by 6% to 6.95p per share, maintaining a 10-year run of growth.
I hold Sage in my portfolio and would like to buy more. However, recent share price gains have pushed the stock’s valuation beyond what I’ve been willing to pay.
Even after today’s drop, the shares are still trading on 30 times 2023/24 forecast earnings with a dividend yield of just 1.9%.
I believe this is a quality business that deserves a premium price tag. But Sage shares are still slightly too expensive for me. I’m going to wait for a better opportunity before buying any more for my portfolio.
