This FTSE 100 stock is at a 23-year high! Is it a buy?

This FTSE 100 stock just got a huge analyst upgrade and is powering higher. Yet the price target set indicates that more gains may lie ahead.

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Shares of Sage Group (LSE: SGE) jumped 5.25% to 918p on 28 June after the FTSE 100 stock attracted an eye-catching upgrade from analysts. This puts the share price at highs not seen since March 2000.

It also means that the tech stock is comfortably outperforming the FTSE 100 index across several time frames:

FTSE 100Sage Group
1 month-1.5%+7%
Year to date+0.75%+23%
1 year+2.5%+44.5%
5 years-1.25%+48%

These figures exclude dividends, so don’t constitute the total return (price appreciation and income). Over any decent length of time, dividends add a few percentage points to the Footsie’s overall return.

But Sage stock itself is no slouch when it comes to dividends. In fact, it has been paying shareholders income every year since 1990. This excellent record gives it the rarified honour of being a UK Dividend Aristocrat.

Unfortunately, I’ve never owned Sage shares. But would I buy them today after this upgrade? Let’s find out.

What happened

Analysts at JP Morgan have raised their rating on Sage stock to ‘overweight’ from ‘neutral’.

What does that mean? Well, an ‘overweight’ rating on a stock means that a professional equity analyst believes the company’s share price should perform well in the future. It’s obviously a bullish signal.

In this case, the analysts have lifted their share price target to 1,110p. That’s around 21% higher than the current price of 918p.

The analysts said that the accounting and payroll software company is “uniquely positioned” to power back-office software automation of small and mid-sized businesses over next decade.

They added: “We believe Sage can sustain a double-digit organic revenue profile through to 2025, with scope to accelerate further in 2026-30“.

Bright clouds

Now, while analysts’ commentary can offer useful insights, an upgrade (or downgrade) by itself wouldn’t influence my decision to invest in a stock. That’s because these opinions and price targets can be wrong, sometimes wildly so.

In this case though, I’m also encouraged by the company’s progress.

For the six months to 31 March, underlying recurring revenue increased by 12% year on year to just over £1bn. Underlying operating profit increased by 14% to £227m.

Impressively, cloud revenues rose by 29%, and the firm launched additional cloud-based software features powered by artificial intelligence (AI). Sage is leaning heavily into AI, and its customers look set to benefit.

For the full year, management now expects organic recurring revenue growth of around 11%.

I think the stock remains a buy

At today’s price, Sage shares trade at around 25 times next year’s forecast earnings. That’s approximately double the average FTSE 100 P/E ratio, which adds a level of valuation risk.

Still, I don’t think that’s unreasonable considering the company’s long-term growth opportunity. Small and mid-sized businesses will need to continue to digitise, especially with the proliferation of AI, and the company is perfectly positioned to help them.

Further, management expects its operating margin to trend upwards in FY23 and beyond. And I’m particularly encouraged that 96% of the group’s revenue is now recurring.

A such, I’d feel comfortable buying the stock today if I had cash to invest. But I wouldn’t wait too long, as the shares may well zip past their 1,110p target this year.

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.

JPMorgan Chase is an advertising partner of The Ascent, a Motley Fool company. Ben McPoland has no position in any of the shares mentioned. The Motley Fool UK has recommended Sage Group Plc. 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.

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