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Should I buy Sage shares today? Here’s what I think

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When it comes to listed companies, the UK isn’t best known for tech stocks. In the US, by contrast, there are big names in the main indices such as Facebook, Amazon and Google owner Alphabet.

The FTSE 100 contains a broad cross-section of sectors, with metals and mining, financial services, energy, and insurance featuring heavily. One of the few software companies in the index is cloud-based accounting provider Sage Group (LSE:SGE).

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Sage shares have underperformed against the FTSE 100 in the last year, trading 25% lower than 12 months ago. In the same period, the Footsie has fallen 10%.

But does the dip in the Sage share price represent a buying opportunity for me as an investor now?

Trading update

In a recent trading update, the business said its recurring revenues performed strongly in the first quarter. Total revenue rose 1.4% to £447m in the three months to the end of December, from a year earlier, as recurring revenue increased 4.7% to £408m.

Sage is shifting its business model away from one-off licence fees to regular subscriptions. Revenue from subscriptions increased to 68% in the quarter compared with 65% for all of the previous year.

Those figures were broadly in line with what analysts had expected. But one factor that may have led to investors shunning the shares in recent times is stunted profits growth.

Pre-tax profits for the company were lower in 2020 than in both 2019 and 2018, leading to questions about whether Sage can return to profits growth. 

Considering the stagnant profits, the fact that the company trades with a price-to-earnings (P/E) ratio of more than 22 does make the shares seem quite expensive. The P/E ratio is one used by investors to calculate the relative price of a stock against its earnings.

Strong balance sheet

While profits growth may concern some, Sage does boast fairly solid financials in terms of its balance sheet. It has cash reserves of £1.2bn and net debt of just £129m.

Its 3% dividend yield isn’t the strongest on offer in the FTSE 100, but it’s still indicative of Sage’s willingness to return profits to investors.

I’m confident that this strong balance sheet will support Sage as it works to get back to growth in the years to come. While competition in the accounting software market is on the increase, Sage is still recognised as one of the market leaders in the area due to the quality of its products.

With that in mind, I think the share price is somewhat undervalued at the moment, potentially due to the fact that Sage has said it will be investing more cash into research and development in the coming years.

While that may not be great news for investors who want short-term gains, I look at stocks with a long-term outlook. I’m a fan of investing in companies that show a commitment to innovation for new products and Sage fits into that category.

All things considered, I’m thinking of adding Sage shares to my portfolio today.

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conorcoyle 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.