There are not too many technology stocks in the FTSE 100 for investors to gain exposure to this dynamic sector. The demand for these limited stocks has increased some of their prices beyond their fair value, in my view.
I know from my years as a senior investment bank trader and private investor that price and value are not the same thing. And it is in the gap between the two that big long-term profits are to be made, in my experience.
However, tumbling stock prices after the US’s imposition of large-scale tariffs has reduced this gap in some cases. So, I looked again at one of the FTSE’s leading technology firms – Sage (LSE: SGE) – to re-assess its investment potential.
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Are the shares now undervalued?
Sage’s 4.9 price-to-sales ratio is bottom of its peer group, which averages 7.7. These firms comprise Salesforce at 6.5, Oracle at 6.7, SAP at 7.9, and Intuit at 9.7.
So, Sage looks very undervalued on this basis.
The same applies to its price-to-earnings ratio of 35.5 compared to its competitors’ average of 53.
But its 10.5 price-to-book ratio is slightly overvalued against its peer group’s 10.4 average.
I ran a discounted cash flow analysis to ascertain what this means in share price terms. This pinpoints where any firm’s stock price should be trading, centred around future cash flow projections for it.
This shows Sage shares are now 14% undervalued, following their recent fall.
So, the fair value for them is £13.74 compared to their present price of £11.82. Market forces can move share prices down as well as up, of course.
Does the business outlook support this view?
A key risk to the cloud-based financial tools provider is the high level of competition in its sector. This could reduce its earnings over time, and it is these that ultimately power any company’s share price and dividend.
That said, consensus analysts’ forecasts are that its earnings will grow 12.4% a year to the end of 2027. Return on equity is forecast to be a stunning 45.1% by that time.
A key positive here for me is that 97% of Sage’s total revenue is recurring, including through rolling software subscriptions. These are mainly from its core clientele of international small- and medium-sized businesses.
Overall in 2024, profits jumped 21% year on year to £529m after a 9% increase in revenues to £2.3bn. Also comforting for me was its £1.1bn in cash reserves and liquidity against £738m of net debt.
Its Q1 results showed a similarly robust performance, with revenues increasing 10% quarter on quarter to £612m.
So will I buy it now?
A 14% undervaluation to its fair value would not normally be sufficient for me to buy a stock targeted for share price gains. There are many other shares in the FTSE 100 with much bigger discounts to their fair value, some of which I own.
However, Sage is much better priced now than it has been for a long time. Additionally, I think its strong earnings growth — and FTSE tech stock rarity appeal — could push its share price much higher over time.
Consequently, if I were not focused on high-yield stocks currently, I would buy Sage stock now and believe it is worth investors considering.
