UK tech stocks are on the rise. Monitoring the FTSE techMARK 100, a growth-based tech index, I’ve seen that tech stocks are outperforming FTSE 100 for the first time in history.
Historically, non-tech companies drove the index while the tech stocks lagged behind. In January 2019, the FTSE techMARK 100 index was at 4,369 compared to the overall FTSE 100 index which was trading at 7,617. After the market crash in March, the tech index has recovered tremendously and is now trading at its all-time-high price of 7,208, ahead of FTSE 100 which is trading at 7,076.
The post-pandemic surge in tech stock shows a switch in investor mentality in the UK. It is an exciting time to invest in some tech stock and Sage Group (LSE:SGE) is on top of my list.
Its shares have risen 23% since March and are currently trading at 704p and showing no signs of slowing down. It is still a buy for me, despite the recent surge as I think the stock is primed for long-term returns.
The company has posted some impressive numbers in the third-quarter (Q3) trading update released recently. Organic recurring revenue in 2021 grew 4.4% to £1,220m from £1,162m in 2020.
An impressive 91.7% of Sage Group’s revenue is recurring, which shows me that its subscription-based software has incredible renewal figures. The number of subscribers to its software also grew by 11% to £920m (Q3 2020: £830m). As a result, subscription penetration increased to 69% (Q3 2020: 64%).
Revenue in North America grew 7% in 2021 to £475m. This is an encouraging sign as expansion potential for tech companies is greater in North America than the UK.
Another factor I look at for potential long-term returns is net cash. Sage has large available cash reserves which stand at £1.3bn. This could add to the current 2021 total dividend of 17.37p. The 2021 interim dividend was boosted by 2% to 6.05p and this trend could continue in the long term given the sales figures and expansion potential using cash reserves.
The company outperformed its expectations of 3% growth in revenue during Q3 2021. Sage’s CFO has stated that “growth is accelerating, driven by increasing demand for Sage Business Cloud solutions, particularly in cloud-native”. The increasing demand for Sage’s primary product is encouraging to me and the tech stock is showing signs of sustained growth over the next five-year period.
Though the short-term figures look promising, returns over the last 12 months are very concerning. The share price has dropped by 6.2%, causing Terry Smith to sell Sage stock in June 2021. Also, the share prices have dropped 2% in the last five years.
The company also faces stiff competition in North America from Amazon Web Services, a leader in cloud computing services overseas.
But I still see tremendous long-term potential with Sage Group and its Q3 2021 financials look strong, which is a good starting point for sustained growth. The stock could be set to continue its impressive run since March over the next five years, making it a must-have UK tech stock for my portfolio.
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Suraj Radhakrishnan has no position in any of the shares mentioned. 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.