Sage shares fall after Goldman Sachs downgrade. Is it still a buy?

Suraj Radhakrishnan analyses if an investment in Sage shares is the right move for his long-term portfolio after the recent downgrade from Goldman Sachs.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

The FTSE 100’s tech staple Sage Group (LSE: SGE) was recently downgraded to ‘sell’ by Goldman Sachs. This triggered a 5% slide in Sage shares yesterday from 741p to 706p.

The software company has been on my watchlist for a while now. Here I look at the possible reasons for the downgrade and also analyse its recent finances and business strategy to see if it is still a buy for my portfolio.

Reason for the downgrade

Analysts at Goldman Sachs moved Sage shares from neutral to sell, with a price target of 700p. The reason cited is the lack of “margin expansion” from the UK financial software company. Taking into account the dynamic software and cloud computing space, Sage Group’s focus on revenue generation over margin expansion is a concern for the banker.

I think there is validity to this assessment. While Sage’s model of recurring revenue through software subscriptions looks attractive, I feel like this affects innovation. The focus on customer retention and acquisitions for existing products could affect the company’s ability to expand to newer revenue streams in the industry, in my opinion. 

Competition and innovation

Sage currently provides automated invoicing/accounting software, HR management systems, and asset management software. Interestingly, Goldman Sachs uses Amazon Web Services (AWS), which is a competitor to Sage Group.

Comparison with AWS is important here because of Sage’s expansion to the US. Although Sage grew recurring revenue in the region by 7%, I think that AWS already has a strong hold over the space. Adding in other competitors like Microsoft (Azure), Google, and IBM, and Sage could be overshadowed by these industry giants.

Also, AWS offers a range of customisable, sector-specific solutions. It facilitates software building, machine learning, and analytics along with traditional accounting and cloud services. Sage focuses on medium and small businesses and has fewer targeted tools. I think this is a roadblock to Sage’s margin expansion efforts, as highlighted by Goldman Sachs. 

Would I invest in Sage shares?

Sage has carved a niche for itself in Europe and America. Its subscription model has over 90% customer retention figures. Financials look strong and the company has a good history of revenue generation. In the first nine months of 2021, recurring revenue increased by 5% to £1.2bn, supported by software subscription growth of 11% to £920m. The 7% growth in North America was primarily due to Sage Intacct, its construction-focused accounting software. This again tells me that sector-oriented products work better in foreign markets. This is an area I see as Sage’s primary weakness. 

Looking at investor returns, the Sage share price has risen 17.5% in the last six months. But, over the last five years, returns stand at a dismal -3.3%. The UK tech company is a defensive option. Its focus on strengthening its existing product line and customer service is commendable. But is it a prudent strategy in the innovation-driven software sphere? I don’t think so. 

I am optimistic about the UK’s tech industry as a whole. But there are other companies in the space that look like much better investments for my portfolio at the moment. I would prefer long-term investments in BAE Systems and BATM Advanced Communications over Sage shares today.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Suraj Radhakrishnan has no position in any of the shares mentioned. Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool’s board of directors. The Motley Fool UK owns shares of and has recommended Microsoft. 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.

More on Investing Articles

piggy bank, searching with binoculars
Investing Articles

Genus rockets 27% in the FTSE 250! Should I buy this UK stock?

Our writer has had this under-the-radar UK stock on his watchlist for a few months now. Why did it suddenly…

Read more »

Aston Martin DBX - rear pic of trunk
Investing Articles

Down 83%, might the Aston Martin share still be a value trap?

The Aston Martin share price has been weak for years. With free cash flow forecast later this year, could it…

Read more »

Investor looking at stock graph on a tablet with their finger hovering over the Buy button
Investing Articles

3 cheap UK shares to consider buying in May

The raft of reports from UK shares in April continues into May. Here are three stocks I think could benefit…

Read more »

Tesla building with tesla logo and two teslas in front
Investing Articles

Could buying Tesla shares this May be a long-term masterstroke?

Christopher Ruane stills sees a lot to like about Tesla's car business -- and potential in some other areas. So…

Read more »

4 Teslas in a parking lot at a charger station
US Stock

Investors buying Tesla stock today face these risks

Tesla stock has crashed by almost half since its record high last December. But with more trouble on the horizon,…

Read more »

British flag, Big Ben, Houses of Parliament and British flag composition
Investing Articles

2 depressed UK shares I’m considering buying in May and holding ‘forever’

Our writer has been looking for bargain UK shares to snap up while they're 'on sale'. These two are definitely…

Read more »

Storytelling image of a multiethnic senior couple in love - Elderly married couple dating outdoors, love emotions and feelings
Investing Articles

If this 12-month Rolls-Royce share price forecast is correct then I’ll be a happy investor

The Rolls-Royce share price is red hot but Harvey Jones accepts it cannot keep rocketing at recent rates. Investors need…

Read more »

Exterior of BT head office - One Braham, London
Investing Articles

4 reasons I’m avoiding surging BT shares in 2025

Despite being impressed with the recent performance of BT shares, this investor has no intention of buying any today. Here's…

Read more »