When looking for tech success stories, many eyes turn to Silicon Valley or London. Few focus on Newcastle, despite that area’s long history of innovation. If you earn dividend income from National Grid today, for example, you can thank Tynesider Charles Merz for co-inventing the power grid. I see Newcastle-based Sage Group (LSE: SGE) as one of the UK stock market’s leading tech companies. Here is why I would consider owning Sage Group shares in my portfolio — if I could buy them at the right price.
Different types of tech company
The idea of a tech company means different things to different investors.
For some people, investing in tech is about getting into an industry still in its formative stages. Even if it is loss-making today, hopefully market expansion and scalability could help winning companies profit from it in future. This is a common logic for investing in the likes of Deliveroo or Ocado.
But other tech companies are already much further down the commercial path. They have proven their business model and are consistently profitable. The tech angle of their business model gives them benefits of scalability already, which can be good for profitability. That describes companies such as Microsoft and Apple.
Sage and the tech model
It also describes Sage Group. The company has been selling accounting software for decades already.
That does not sound very glamorous. But Microsoft has done tremendously well out of products such as Excel that, although unexciting, play an important role in many businesses. I think that is also true of the accounting software provided by firms like Sage Group. Millions of companies need to do their accounting and software makes that a lot easier for them. There is a cost to switching such a system, once users are used to it and the database contains historical information. That gives a supplier such as Sage pricing power. Many users will accept a price increase rather than suffering the trouble, expense, and uncertainty of switching to a different piece of software.
That helps explain Sage Group’s attractive 15% post-tax profit margins last year. As a 3% slide in revenues showed, however, there are risks here. The marketplace is crowded with well-funded competitors. They may undercut Sage on price to lure customers. That could hurt sales and profits at Sage. Both fell last year.
Could Sage Group shares fit my portfolio?
Although I like the business model, the current business performance seems a bit weak. Sage’s long run of annual dividend increases is appealing, but dividends are never guaranteed.
A price-to earnings ratio of 30 looks expensive to me. At an attractive price I would be happy to add Sage Group shares to my portfolio. But I do not plan to do that at the moment. I think the business could continue to benefit from the tech business model. But at the current valuation, I do not see the shares as a hidden gem.
