The FTSE 100 isn’t known for its tech businesses. However, there’s at least one tech stock in the index I think is worth buying today.
FTSE 100 giant
Sage provides accounting software for businesses. This is a relatively defensive market because customers are pretty sticky. Anyone who’s managed a business knows that trying to change accounting software, or even accountants, is a challenging and complex procedure. Therefore, it’s generally easier to do nothing.
The company’s renewal rate figure evidences this, indicating Sage’s ability to retain and generate additional revenue from existing customers.
For the six months to the end of March, the group’s renewal rate was 97%. In the first half of 2020, it was 101% because of it being able to get more revenue from those already signed up. I think these figures speak volumes about the company’s ability to retain and upsell to customers.
As well as this sticky customer base, I’m also attracted to the FTSE 100 company because it’s in the middle of a transition. Sage has been investing significantly in its cloud software business. By providing customers with a cloud subscription service, the company can sell to anyone in the world. It’s also able to bundle other products with its accounting software.
A regular recurring subscription for the cloud products also provides a steady income stream for the group, rather than one large upfront payment.
Management has been pushing ahead with the cloud migration for some time, and it now seems to have reached an inflection point. In 2020, in the first half of the company’s 2021 financial year, 68% of its customers were using its cloud offer, from 63% in the prior year period.
What’s more, 65% of customers were using Sage’s Business Cloud, a suite of tools to help small and medium-sized enterprises as well as the self-employed. That figure was up from 59% in the prior year period.
Thanks to this growth, recurring organic revenue increased by 4.4% to £811m for the period. This growth was underpinned by software subscription revenue growth of 11% to £608m.
These figures suggest to me that the FTSE 100 company is making substantial progress. As the subscription business grows, Sage’s recurring revenues and cash flows should also increase. This will provide the group with more capital to reinvest and return to investors.
That said, I’m not going to take Sage’s growth for granted. The accounting and business software market is incredibly competitive. There are many firms chasing market share, some of which have deeper pockets and more international recognition than Sage. If the company can’t crack these competitors, its growth could severely disappoint.
The risk of competition is probably the biggest challenge the company faces right now.
Still, up to this point, Sage has been able to navigate the competitive environment. As such, I’d buy the stock for my portfolio today. As I believe the FTSE 100 company has tremendous growth potential as a technology investment.
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Rupert Hargreaves 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.