Up 50% in a year as revenue climbs, does the Sage share price have more to give?

The Sage Group share price was a runaway success in 2023. And the software tech firm has just released strong Q1 growth figures.

| 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.

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

Image source: Getty Images

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 Sage Group (LSE: SGE) share price has soared 80% in the past five years, with the bulk of that coming in the last 12 months.

Sage describes itself as “a leader in accounting, financial, HR and payroll technology for small and mid-sized businesses.

And a look at its latest trading update shows just why growth stock investors like it so much.

Strong three months

For the first quarter of its financial year, to 31 December 2023, Sage posted a 10% rise in revenue. It’s global too, with gains in all regions.

North America claimed nearly half the total revenue, and showed the biggest rise at 13%. The US market is very competitive, so that says a lot to me.

I’m also impressed to see Sage’s cloud-based offerings making up 79% of all revenue.

AI here too

CFO Jonathan Howell said: “Small and mid-sized businesses are continuing to digitalise despite the ongoing macroeconomic uncertainty, and through our trusted cloud solutions and innovative, AI-powered services we are well positioned to support them.”

Hmm, AI, Artifical Intelligence. Excuse me if I twitch a bit.

I won’t knock AI, as it’s surely capable of some impressive things. But it looks to me as if a lot of investors have been jumping on anything to do with AI, perhaps a bit indiscriminately.

And I do wonder how much AI can really do for such formulaic and rules-based things as accounting and financial software.

Outlook

At FY time in November, Sage said organic revenue growth in 2024 should continue at 2023’s pace. It also expects margins to improve. This guidance remains the same at the Q1 stage this year.

It suggests solid growth, and we could be in for another great year. But I question whether it’s really enough to justify the high Sage share price right now, and the valuation it represents.

Billionaire investor Warren Buffett famously said: “It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.

I do think Sage is a wonderful company, but I’m not so sure about the fair price part of it.

Valuation

Broker forecasts put Sage on a price-to-earnings (P/E) ratio of 36 for the current year, more than three times FTSE 100‘s average right now.

After three more years of predicted earnings growth, that would drop to around 27 by 2026. Now, top growth stocks often command such high ratings. But this makes me a bit nervous.

It’s not like there are any decent dividends to speak of, with a yield of only 1.7% on the cards.

Bottom line

So what’s my take on it? I’ve underestimated top growth stocks many times in the past. And I could well be wrong about what Sage shares might do this year.

But the fear of an AI bandwagon keeps nagging at me, and I’d like to see how that goes with the 2024 crowd.

For me, it’s a great company, and one I might buy if we see future share price dips.

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.

Alan Oscroft 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.

More on Investing Articles

Investing Articles

Down 10% in a month with a 10% yield! Is this stock a no-brainer buy for a second income?

Harvey Jones bought this FTSE 100 stock because it offered an unmissable double-digit yield. Now he's wondering whether it will…

Read more »

Investing Articles

Here’s the latest FTSE 100 dividend forecast, and it’s growing

Despite a generally good year for UK share prices so far in 2024, yields are still strong. And the dividend…

Read more »

Dividend Shares

2 dividend shares that are smashing the rest of the FTSE 100

Jon Smith flags up two dividend shares that are well ahead of the FTSE 100 average for both the dividend…

Read more »

Investing Articles

I’d love to buy this FTSE 100 value stock today

This top-tier value stock has massively trailed the FTSE 100 so far in 2024. But as inflation holds steady and…

Read more »

Investing Articles

Down 87%, is this once-famous stock set to explode like the Rolls-Royce share price?

Unlike the roaring Rolls-Royce share price, this growth stock and former household name has totally bombed. But is it due…

Read more »

Investing Articles

As investor sentiment sinks, is the stock market about to crash?

Investor confidence has dropped sharply in recent quarters, data from Saxo Bank shows. Is a stock market crash coming? And…

Read more »

Investing Articles

If I wanted to invest in Nvidia, I’d buy this FTSE 250 stock at a 12% discount

Nvidia stock has certainly rediscovered its mojo in October. However, this investor thinks there might be a better alternative in…

Read more »

US Stock

If I’d invested £1k a year ago in the S&P 500, here’s how much more I’d have versus the FTSE 100

Jon Smith details the reasons behind the difference in performance of the S&P 500 and the FTSE 100 and outlines…

Read more »