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Should I buy Sage Group shares for my UK tech portfolio?

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The Sage Group (LSE: SGE) shares fell 20% in the past year. However, the company’s shares rose 5% on January 21st after it released its first-quarter fiscal year 2021 trading update.

Sage Group shares’ recent trading update

Sage Group’s revenue grew by 1.4% year-on-year to £447m. It was primarily helped by the 4.7% growth in recurring revenue to £408m. Other revenue fell 24% to £39m. In my view, recurring revenue is one of the important metrics while evaluating a tech company, since recurring revenue is the portion of its revenues that is expected to continue in the future.

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Recurring revenue growth was supported by software subscription growth of 11% to £303m. Geographically, North America’s recurring revenue grew by 6.4% to £160m. It was driven by a strong performance from Sage Intacct, which is a powerful cloud financial management platform. Northern Europe’s recurring revenue grew by 3.3% to £96m.

In line with the management’s long-term plan to drive growth in recurring revenues, it is increasing investments in the fiscal year 2021 in cloud native solutions. Looking into the recurring revenues, the Future Sage Business Cloud Opportunity grew by 6.2% to £366m, primarily helped by 27% growth in cloud native revenue to £63m.

According to the 2020 annual report, Sage Group shares’ total addressable market (TAM) is estimated to be $33bn in 2021. The TAM comprises over 69 million small and medium businesses. Sage’s TAM is expected to remain broadly stable in 2021 when compared to 2020, due to the decline in the on-premise market, cloud growth is expected to be 6% in 2021 and 11% in 2022. The Cloud share of TAM was $15.7bn in 2020.

The company has a stable balance sheet. It has cash and equivalents of £1.2bn and net debt of £129m.  Its dividend yield is 2.84%, which I consider to be decent considering the prevailing interest rates. In the earnings call, the management said that they would only consider share buybacks when they think it’s appropriate and have expressed their intentions to invest in the business and might do bolt-on-acquisitions where appropriate. In the first quarter, the company made an equity investment in Brightpearl, which is a digital e-commerce and retail platform.

Five-year share price

Investors who have bought the stock and held it in the past five years might be disappointed as the stock is more or less about the same level. However, the share price has fluctuated and rebounded 40% from its low in 2016. Similarly, in 2018, it rose 68% from its low and 54% in 2020 after the sell-off in March.

Sage Group shares are currently trading at a price to earnings ratio of 22.13 when compared to its five-year average of 27.89. Analysts expect the earnings per share to drop to 21p for the fiscal year ended September 2021 from 28p for the fiscal year 2020. I would like to wait and better understand the impact of Covid-19 on small and medium-size businesses before buying the stock.

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Royston Roche has no position in any of the shares mentioned. 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.

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