Today, the long-term investing case for The Sage Group (LSE:SGE) shares is put under the microscope by two Fools with opposing stances…
Bullish: Christopher Ruane
Investors often bemoan the lack of British tech success stories. But I think Sage fits the bill.
It focusses on a dull but resilient business sector, with clients that have sizeable budgets. Sage’s software aids customers’ business performance. It therefore offers a clear value proposition. Once installed, clients incur a cost in time and effort if they switch to an alternative. That gives Sage pricing power.
Last year, revenues rose 5% to £1.9bn. The consistently profitable software provider reported profit after tax of £260m.
The shares currently trade on a price-to-earnings (P/E) ratio of 32. That is higher than I normally like, admittedly. But I think the firm’s robust performance and strong revenue growth from its Sage Business Cloud product line point to the opportunity for future earnings growth. As a long-term investor, if I had spare money to invest today, I would be happy to buy Sage shares for my portfolio and hold them.
Bearish: James McCombie
Sage increased its revenues from £1.85bn in 2018 to £1.95bn in 2022. That is a meagre 1.32% growth per year, yet the stock trades at a P/E ratio of 32. That kind of valuation must assume a high-growth future, but I am not sure where it will come from.
The company has nearly finished making its software completely subscription access and cloud-based. This has been going on for years and so far has not significantly impacted the top or bottom line: earnings per share declined from 0.27p in 2018 to 0.25p in 2022.
Sage is increasing its marketing budget, particularly towards small businesses. But I worry that they might view bells-and-whistles accounting and payroll software as convenient rather than essential. I fear that rampant growth will not materialise, putting pressure on the share price, and lifting the dividend yield from its 2.2% level.
