UK tech stock
Sage Group is one of the UK’s largest listed tech firms. It specialises in accounting and payroll software for small to mid-sized businesses. A recent shift in strategy to migrate its products to the cloud software-as-a-service (SaaS) subscription model seems to be working.
As I write, shares in Sage are trading for 820p, which is a 43% return since this time last year when the shares were trading for 573p. At current levels, the Sage share price has only recently surpassed pre-crash levels.
Why I like Sage shares
Tech stocks have become more defensive since the pandemic began and the market crashed. Defensive stocks refers to stocks with resilient and predictable earnings despite worsening market conditions. Typical defensive stocks used to be healthcare, utilities, and transport. The pandemic has changed this. The reliance on technology for day-to-day operations of businesses has increased and I believe it will continue to do so. Sage’s products are key components for the running of any type of business. Despite macroeconomic pressures on small to medium-sized businesses, the need for accounting and payroll services will always be a requirement.
Sage has a good track record of performance as well as impressive recently reported results. I understand that past performance is not a guarantee of the future but I use it as a gauge nevertheless. Sage has generated consistent growth and profitability has been excellent too. Coming up to date, audited results for the year ending September 2021 were released last month. The shift towards SaaS seems to be paying off. Sage reported organic recurring revenue growth of 5.4%, driven by growth in its Sage Business Cloud division of 19%. Furthermore, annualised recurring revenue increased by 8%. Cash generation was strong, supplementing a robust, cash-rich balance sheet.
At current levels, Sage looks cheap to me. It sports a price-to-earnings ratio of just 30. I think this is cheap for a tech stock with such a good track record of performance and growth year-on-year.
Despite believing Sage is one of the best stocks to buy, I know that it still comes with risks. Competition among tech stocks is intense and I must take this into account. For example, Xero is a new entrant into Sage’s marketplace that could eat away at Sage’s burgeoning market share with its own offering and hamper Sage’s performance.
Overall, I view Sage as a quality company with defensive attributes and a good track record. Recently, analysts noted they expect the share price to rise to the 900p level, which means its recent upward trajectory could continue. It is worth noting that forecasts can change and aren’t something to rely on.
It also pays a dividend that will make me a passive income, although dividends aren’t guaranteed. Furthermore, it has a good balance sheet to ward off any issues if they were to arise. I would add the shares to my portfolio at current levels.
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Jabran Khan has no position in any 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.