The market is currently slightly overvaluing Sage Group (LSE:SGE), in my opinion. Nevertheless, this FTSE 100 gem has some high price targets from analysts. In addition, I think its product and service offerings have the potential to help transform accounting. Therefore, the company seems of high value operationally to me.
Automated accounting
The firm is known internationally for its accounting and enterprise planning software. However, recently, management has been pivoting it towards a deeper focus on automation. I think this is going to be a big market in future as more businesses capitalise on AI. One core change is likely to be that intelligent machines perform repetitive accounting tasks.
In fact, CEO Steve Hare told the PA news agency that there will be no more accountants working with receipts and working out tax returns in the future. He says it will all be digitalised. In many respects, I think this indicates that traditional accountancy could be dying.
What I don’t think is dying is Sage, which is well-positioned to be one of the core beneficiaries of this industry shift. Hare has mentioned that accountants in the future will likely take strategic and advisory roles. Software such as that developed by Sage will act as the equivalent of today’s people doing tax returns and company accounts.
This is the main reason I’m bullish about the shares. The firm is developing a moat in automated accounting. This is a field I think is going to see exponential growth over the next decade.
Competition remains
Despite the fact that Sage’s product and service positioning is formidable, it still faces a lot of competition.
For example, QuickBooks is developing extensive automation features, as is Xero. Furthermore, arguably, the most daunting competitors in the field are the much larger Microsoft Dynamics 365 Finance, SAP S/4HANA Cloud, and Oracle Fusion Cloud Financials.
One of the major risks that the company faces is big tech companies consolidating their positions in automated accounting and potentially inhibiting Sage’s growth. This is especially true because such firms are those developing the most powerful AIs, which Sage doesn’t have the capability to do.
15% growth forecast by analysts
In just 12 months, the consensus from 20 analysts is that Sage will be worth approximately 15% more than what it’s worth today.
I expect its earnings per share to grow at 20% or more annually over the next three years. This is moderately lower than analysts’ estimates. That helps to explain why the price-to-earnings ratio is over 40.
Despite the fact that this is certainly not a value opportunity, I think Sage’s long-term growth could be very promising. Even if the price-to-earnings ratio contracts to 35 over the next three years, the stock could still reach £22 by September 2027, based on the above. The current price is £10.50.
Sage is on my watchlist
I think automation is going to generate a lot of profits across all industries. It should significantly impact accounting, in large part due to Sage.
Therefore, this is one company I don’t want to miss the boat on. I’ve already invested all of my cash in other stocks for now, so I’m not buying the shares yet. However, it’s high on my watchlist.
