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Is Sage Group a dark horse or should it be cut loose?

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With its stock price ticking along in the green in 2021, Sage Group (LSE: SGE) investors may be thinking that their luck has finally turned, especially with the cloud software developer weathering the recent global tech sell-off.

However, going beyond the past three months, there are worrying signs that Sage is slowing down, with even darker days ahead. So, amid growing competition from massive tech firms in the US as well as domestic policy changes that threaten its business, is Sage still a good investment for my tech portfolio?

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Threats to Sage’s growth

While every company has threats to its business, some are less equal than others. After all, nobody at Amazon is exactly worried about competition to AWS (Amazon Web Services) right now. However, for its rival across the Atlantic, there are some worrying threats to growth that could spell trouble going forward:

  • Sage is expected to see its earnings decline by an average of 1% per year over the next three years.
  • Sage has a high ratio of debt to equity at 37.5% as of 2020, with total debt accruing to just under £1 billion in that period.
  • The threat of both Covid-19 and Brexit has led to higher, one-off items of expenditure.

Should I buy Sage Group stock?

While to many, the share-price performance over the past six months may represent a good buying opportunity — Sage stock is down almost 18% since September — Sage has been performing poorly for a long time now. In the past five years, its stock price has actually declined 6% at the time of writing, affording it very slow but gradual growth back to its all-time tech bubble highs of early 2000. However, the world of tech has changed a lot since those highs, and Sage still has a long way to go to convince me that it can reach the valuation it had in its heyday once more.

That’s not to say that there aren’t a lot of reasons to maintain faith in Sage Group. In 2020 it saw its cash reserves increase 128% to £476 million, while it also earned £406 million from its operations for a cash flow margin of 21.33%. Overall, its margins are actually pretty solid:

  • Net profit margin: 34%
  • Operating margin: 23%
  • Gross margin: 38%

So, I have a classic “should I, shouldn’t” conundrum here that appears to have all-but-vanished from sentiment towards US-listed growth stocks. Although Sage Group is not likely to bring my portfolio explosive growth, it is a solid bet through thick and thin for me as a risk-averse investor. However, if I am looking to shoot for the moon, this may not be the right stock.

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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Jamie Adams 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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