Cloud-based financial tools provider Sage Group (LSE: SGE) has been on my watchlist for some time.
As one of the relatively few FTSE 100 technology stocks, at least compared to the S&P 500, it interests me. Unfortunately from my perspective, it has interested many other investors too. This resulted in its price rising into very overvalued territory as far as I was concerned.
And regardless of how much I like a stock, I will not simply pay any price to own it. In fact, I do not even want to pay a ‘fair value’ if possible. I want it for as much below that as I can get.
However, finally — following the 30 July release of its Q3 2025 results — I think significant value in the share has emerged.
Was there something wrong with the results?
It is true that price and value are not the same thing. The former is whatever the market will pay for an asset, while the latter reflects the fundamental value of the underlying business.
That said, a price drop can obviously drive an overvalued share down into territory that better reflects that core value. Sage’s shares have dropped 17% since results day, although I think they are now more undervalued than that.
So, what was wrong with the Q3 numbers? As far as I can see — absolutely nothing, aside from Sage leaving its performance targets unchanged from earlier results this year. But in my view, there is no need to keep upgrading targets if they are solid in the first place.
And in Sage’s case, they certainly are. It expects organic total revenue growth this year to be 9%+. Operating margins are expected to trend higher in FY25 and beyond. In 2023, they were 20.5%, in 2024 they were 22.7% and in H1 this year they were 23.2%.
The Q3 numbers reflected such strong growth, with revenue increasing 9% year on year to £1.862bn.
A risk here is competition in the sector squeezing its margins.
However, analysts forecast that Sage’s earnings will rise 12.8% each year to end-2027. And it is this growth that powers any firm’s share price higher over time.
So what about the value proposition now?
The initial part of my price assessment is to compare Sage’s key valuation measures against its competitors.
Its price-to-earnings ratio of 30 is very undervalued compared to its peer group average of 47.9. Indeed, it is bottom of the group that comprises Salesforce at 36.5, SAP at 42.6, Oracle at 55.1, and Intuit at 57.2.
It is also very undervalued on its 4.3 price-to-sales ratio against its peer group’s average of 9.1.
That said, I found the same sorts of comparative undervaluations before. But when it came to the key test – the standalone discounted cash flow valuation – Sage was found to be significantly overvalued. This can happen when an entire sector’s valuations have been overextended due to high demand.
This time, though, the DCF shows Sage’s share price is 32% undervalued at its current £11.08 level! Therefore, its fair value is £16.29.
This is more than a sufficient price discount to fair value for me to buy the stock as soon as possible. And this is precisely what I will do.
