Sage (LSE: SGE) remains a high‑quality, high‑margin FTSE 100 software business with strong recurring revenue and consistent growth.
But the cloud-based financial tools provider is down 22% from its 6 February 12-month traded high of £13.48.
The key question for me as a shareholder is how this translates into value, which is different from price (value reflects the underlying business fundamentals, whereas price is simply the amount the market will pay at any given moment).
So does Sage look an unmissable bargain to me right now?
The fundamentals
Any company’s share price is ultimately driven over the long term by earnings (profits) growth. A risk to Sage is that higher interest rates and tighter credit make firms more cautious about starting or expanding. That naturally slows new‑customer onboarding for software providers.
That said, consensus analysts’ forecasts are that the group’s earnings will grow by 11.9% a year on average to end-2028.
These projections look very well founded to me on recent results. Its full-year 2025 numbers, released on 19 November, showed underlying total revenue increase by 10% year on year to £2.513bn. This was powered by the firm’s subscription-based recurring revenue model.
Meanwhile, underlying operating profit soared 17% to £600m. This drove a strong margin increase of 1.5 percentage points to 23.9%, further supported by disciplined cost management.
The firm delivered a strong cash performance, converting 110% of underlying profit into cash, thanks to rising subscription revenue. And its balance sheet stood at a robust £1bn of available liquidity.
It also announced a £300m share buyback programme, reflecting its strong financial position and confidence in its growth prospects. Such measures can support share price gains.
So is it a bargain?
A comparison of Sage’s key valuation measures with those of its peers could give the impression of a major bargain. Its 27.7 price-to-earnings ratio is the lowest in its competitor group, which averages 37.3. This comprises Salesforce at 33.7, SAP at 34.9, Oracle at 37, and Intuit at 43.7.
Its 4.1 price-to-sales ratio — again, bottom of the group — also looks very cheap.
But this is where the limitation of these relative valuations really shows up. If an entire sector is overvalued then, by comparison, another stock can look cheap, regardless of whether this is true.
To find out the truth, I always use the discounted cash flow model, which produces a clean standalone valuation. It does this by using cash flow forecasts for the underlying business, which also reflect consensus earnings growth projections.
These and my own calculations — including a discount rate of 9.2% — show that Sage may be 15% overvalued at its current £10.45 price. So its fair value is £9.09.
Other analysts’ DCF modelling may produce more bullish of bearish results, of course.
My investment view
I believe Sage’s strong forecast earnings growth, if sustained, will support future share price gains.
However, I also think that the current forecasts are almost entirely factored into the current valuation. Given this, I am happy to keep my shareholding in the firm, but I will not be adding to it at the present price.
Instead, I am looking at other FTSE stocks at major discounts to their fair value.
