Up 45% in a year! Here’s why I think this FTSE 100 stock will keep on growing

While Sage could face threats from advanced AI competitors, Oliver thinks its place in the FTSE 100 is stable for the indefinite future.

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A lot of the time, high-growth businesses generate amazing returns for good reason. I believe this FTSE 100 investment is no different, as it offers a crucial software set which has been transforming most industries’ financial operations for a long time.

The company in question, Sage Group (LSE:SGE), isn’t the only firm doing this. There are quite a few very well-established businesses seeking to continue evolving accounting and finance work through efficient technology processes. Now artificial intelligence (AI) is on the scene, it’s likely the changes will come faster than ever.

A leader in finance technology

Sage offers multiple work solutions for individuals all the way up to full enterprises. Its most notable services are in accounting, payroll, and human resources. But it also offers comprehensive platforms for unified access to multiple workloads at once. Soon, it’s launching Sage Copilot, which will bring AI assistance to the forefront of its offerings.

However, as I mentioned, there are quite a few competitors it is having to contend with. These include Intuit, Oracle, SAP, Microsoft, Xero, and ADP. Intuit is notable because it owns QuickBooks and TurboTax. Both of those directly compete with Sage’s main focus on small to medium-sized businesses. Additionally, some of the larger companies like Microsoft and SAP will undoubtedly have more resources to capture most of the Fortune 500 customers.

Everyone knows the company is great

It’s often the case that great businesses are no secret. That’s why it’s very difficult to find an appealing valuation when I’m looking at the best growth investments.

At the moment, Sage has a forward price-to-earnings ratio, which takes into account future earnings estimates, of around 33. That’s 38% higher than the industry median. It’s not surprising that the valuation is so high at the moment. After all, the shares have grown 45% in price in the last 12 months.

In my opinion, that strong rally has made the shares slightly overvalued. But that doesn’t necessarily mean the investment is bad for my portfolio. Instead, it means I might just experience a short-term decline if I bought it right now before the long-term growth causes it to rise above the current price again.

Navigating the emerging risks

One of the core concerns Sage outlined in its most recent annual report is that it could face difficulty in staying current as advanced AI models start to replace certain technology work processes more dramatically.

It could become the case that it is not the best finance-focused or technology-experienced companies in general that excel in Sage’s field, but actually, the companies that are most astute and skilled at developing and deploying advanced AI for finance tasks. That could create new market leaders in firms run by executives with widely different skills to Sage’s leadership team, like in computer programming, machine and deep learning, and AI-application development, disrupting the demand for Sage’s services.

The price keeps on going up

Sage had its initial public offering as far back as 1989. While it went through a bubble in the 90s like other technology stocks, since 2002, the shares have been on a slow and steady climb from around £1.50 to £11.60 today.

I think the price is going to keep on increasing. So, the company is high up on my watchlist for when I next invest.

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.

Oliver Rodzianko has positions in Microsoft. The Motley Fool UK has recommended Microsoft and 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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