FTSE 100 multinational software powerhouse Sage Group (LSE: SGE) is down 18% from its 6 February £13.48 one-year traded high. Straight off, there are two key points to note about this, in my view.
The first is that for all stocks, price and value are not the same thing. Price is simply whatever the market will pay for a share at any given time. But value goes deeper than that, reflecting the true worth of the underlying business’s fundamentals.
That said, the second point is that this stock operates in a sector that broadly tends toward overvaluation. I think this comes from the more pronounced supply-demand imbalance in FTSE technology stocks than in, say, the S&P 500. That is, there is high investor demand for these shares in both indexes, but there are fewer options in the FTSE.
I bought this stock some time ago, based on its strong earnings growth prospects back then. It is these that ultimately power any firm’s stock price (and dividends) higher over time.
But it also factored in that the shares were at a significant discount to ‘fair value’ at that time.
After such a price drop, I wonder whether now is the time for me to buy more.
Is it undervalued?
The best way I have found of ascertaining any stock’s true worth is through discounted cash flow (DCF) analysis.
This pinpoints the price at which any share should trade, based on the cash flow forecasts for the underlying business.
In Sage’s case, it shows the shares are only 1% undervalued at their current £11.01 price.
So, their fair value is £11.12.
As market volatility can move shares up and down in a day way more than this, the undervaluation is meaningless.
That said, if I took my investment cue solely from standard valuation comparisons to competitor stocks I would see something different.
Sage’s 30.1 price-to-earnings ratio looks extremely undervalued compared to its peer group, which averages 47. This comprises Salesforce at 33.9, SAP at 40.6, Intuit at 49.2, and Oracle at 64.2.
The same extreme undervaluation is also apparent in its 4.3 price-to-sales ratio (bottom of the group) against its peer group’s 9.2 average.
Sage may well be undervalued compared to these firms. But it does not mean that it is undervalued on a standalone basis. This reinforces my view of the superiority of the DCF valuation method over any comparative valuation measures.
My investment view
A risk to the business is high competition in its sector that might pressure its earnings. However, analysts forecast that its earnings will grow by a strong 11.8% a year to end 2027.
Its recent results support these numbers, with H1 2025 seeing a 16% year-on-year jump in operating profit to £288m. Earnings before interest, taxes, depreciation, and amortisation rose 14% to £334m. And profit after tax increased 15% to £206m.
However, all of this is factored into the current fair value – around which the stock is already priced.
So I will not be adding to my holding right now. But I have my screener set to alert me if it falls to at least 30% under fair value. At that point, I would buy more. If it never falls to that level, then I am fine with what I have anyway.
