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This UK tech stock looks too cheap to me. I’d buy today

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The FTSE 100 is dominated by mining, banking and oil stocks. But there’s a significant lack of tech stocks. This has been particularly noticeable recently, with the S&P 500 greatly outperforming the FTSE 100. One reason for this is the sheer number of quality tech stocks in the S&P 500. Even so, UK accounting software specialist Sage Group (LSE: SGE) is an exception. I’m particularly interested in this stock after its recent earnings, which triggered a fall of 16% in its share price. I believe this was unwarranted and am therefore very tempted to buy.

Why the share price fall?

Although its 2020 financial performance was far from outstanding, it wasn’t enough in itself to cause such a substantial drop. In fact, total revenues rose 3.7% to £1.8 bn, and recurring revenues rose 8.5% to nearly £1.6bn. The fact that many of the revenues were recurring also provides the company with some stability moving forward.

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Slightly more worrying was the fact that operating profits fell 3.7%. Although not a dramatic fall, it’s nonetheless a worry for the company. When comparing these results to other tech stocks, especially its American rival Intuit, it’s clear that Sage has underperformed this past year. This was one reason for the share price fall.

Are changes coming?

The group has actually been undergoing a transition to more online subscription services over the past few years. This has meant that while revenue from software subscriptions rose by over 20% during the first half, revenues from traditional software sales were much weaker, falling by 26%.

While I completely agree that this is the right move, it does come at a cost. For example, the firm has stated that profit margins could fall by up to 3% next year due to increased investment in its cloud operations. This was another fundamental reason for the drop in the Sage share price.

Would I buy this tech stock?

I’m not overly worried by this recent news and instead, believe it offers me a good time to buy. In fact, a company prioritising long-term profits over a short-term boost is exactly the kind of company I look for. While Sage may not be rivalling US tech stocks just yet, there is hope for the future.

In addition to this, the group is in very strong financial health. For example, in the last year, net debt has fallen from £400m to just £150m. This means that it has the financial strength to improve the business, and potentially complete further acquisitions to enhance it.

It also hopes to maintain the dividend in real terms year-on-year. As a result, the full year dividend has most recently been increased by 2% to 17.25p. This equates to a dividend yield of around 3%. Although this is by no means extraordinary, it is far larger than many other tech stocks, and dividend cover of around 2 means that it is also very sustainable.

All in all, there is therefore a lot to like about this stock. Provided that it can implement its strategy effectively, now seems like a good time for me to buy.

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Stuart Blair has no position in any of the shares mentioned. The Motley Fool UK owns shares of and has recommended Intuit. The Motley Fool UK has recommended Sage Group. 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.