Familiar names like Nvidia, Microsoft, and Tesla tend to dominate retail investors’ interest in tech shares. Following this week’s stunning trading update, I think Sage Group (LSE:SGE) shares should be added to the conversation.
The FTSE 100 company’s delivered strong and sustained earnings growth in recent years. And City analysts expect its impressive record to continue. This is illustrated in the table below.
Naturally, I need to consider how realistic these bottom-line forecasts are. Corporate earnings can often fall below, or even sail above, analysts’ expectations.
So just how robust are current projections? And should I buy Sage shares for my portfolio when I next have cash to invest?
The bull case
The best place to start is by taking a look at those remarkable full-year trading numbers. They showed a company that’s delivering for shareholders on a number of fronts.
To recap, Sage builds accounting, payroll, and human resources software for small businesses and up. Right now sales are flying: underlying revenues rose 9% in the 12 months to September, which reflects the ongoing progress the firm’s making in new tech frontiers like cloud computing and artificial intelligence (AI).
EBITDA margins, meanwhile, rose 1.6% year on year to 26.6%. This pushed EBITDA 16% higher, while underlying operating profit surged 21% from the same 2023 period.
Sage is thriving as companies increasingly digitalise their operations. And by embracing advanced technologies it’s putting itself at the forefront of its industry.
There appears to be much more to come as well, following the launch of products like its generative AI tool Sage Copilot last year.
It’s leaning heavily into the field of machine thinking — an area which chief executive Steve Hare predicts will “change the nature” of accounting — and plans to focus on Sage Business Cloud to deliver future growth.
The bear case
That said, Sage’s operations are highly sensitive to the broader economy. So despite the excellent progress it’s making in product innovation, this could count for little during downturns when companies row back on spending.
I mention this because the global economic outlook remains highly uncertain. On the plus side, interest rates are coming down. But sticky inflation in some regions mean further reductions may be limited.
Added to this, China’s economy continues to struggle, and growth-sapping trade tariffs could be coming when President-elect Trump re-enters the White House in January.
The verdict
Today Sage shares trade on a P/E ratio above 30 times. That’s high on paper, but it’s not unusual for tech stocks with high growth potential like this.
I’ll be interested in picking up some shares for my own portfolio at the next opportunity. I’m encouraged by its excellent progress in advanced technologies, and it’s rewarding investors too with share buybacks and healthy dividend hikes.
It may encounter some turbulence in the near term if the global economy splutters. This scenario may also put earnings forecasts in jeopardy.
But this doesn’t concern me overly as a long-term investor. I think it could be a great growth share for me to buy.
This post was originally published on Motley Fool
