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Sage shares have pulled back. Should I buy?

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Sage (LSE: SGE) shares have pulled back recently. In the past six months the stock is down 19%, but is flat over the last 12 months.

I reckon now could be a buying opportunity. Even the high profile UK fund manager, Terry Smith, owns Sage shares. He holds the stock in his concentrated global portfolio, the Fundsmith Equity Fund.

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Here’s why I’d buy.

Sage: on overview

In a nutshell, Sage is an accountancy software as a service (SaaS) company. It targets small and medium sized businesses as well as the self-employed. Its business model has changed and Sage is now selling subscription cloud-based software that brings in recurring revenue.

What I like about the company is that the subscription model offers sales visibility and stability. While Sage does have some competition from rivals such as Intuit and Xero, its products are generally regarded as high-quality.

I reckon once a business decides to use Sage’s products, it’s unlikely to switch to a competitor due to the hassle of changing. In other words, Sage makes it ‘difficult’ for customers to move to another platform.  I like that the customer lifetimes associated with Sage’s products are likely to be long.

I think the benefits of cloud applications and services have been bought into sharper focus due to Covid-19. Sage’s products allow customers to work remotely with ease and efficiency. I reckon Sage is in a great position if companies decide to continue with working from home after the pandemic.

Simplification

Steve Hare became the CEO of Sage three years ago. His key priority was to simplify and make Sage a more focused business. Hare has been reducing exposure to non-core business lines and geographies. I reckon investors welcome a simplified business as it makes it easier to understand and invest.

Since then Sage has sold its businesses in Switzerland, Poland, Asia, and Australia. I think it’s worth noting that the assets sold mainly consist of local products and are not part of Sage’s key offering, which is Sage Business Cloud.

Strong balance sheet

Part of the reason why I’d buy Sage shares is due to the strength of its balance sheet. In its latest trading update, the company has £1.2bn in cash and available liquidity. It has a low net debt position of £129m.

What I also like is that it increased its dividend during the pandemic. To me, this highlights the strength of Sage’s financial position. Especially during a time when most companies were either cutting or suspending their dividends.

Why have Sage shares been falling?

Sage is still transitioning into a subscription-based online company. So this is likely to incur costs and impact profitability in the short term. It has also said that it will be spending money on the development of its products. Again this will squeeze profit margins.

I’d buy Sage shares now especially that given they have pulled back. Even the company has started a £300m share buyback programme. And why not? Sage clearly has the funds to do so and believes the stock is undervalued. I reckon now could be the time to snap up shares in a leading UK tech firm.

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Nadia Yaqub 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.

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