There are far fewer technology stocks in the FTSE 100 than in the S&P 500. Given the price gains some of these US shares have made, any such British stock grabs my attention.
Cloud-based financial tools provider Sage Group (LSE: SGE) is one of the firms that keeps catching my eye.
However, it is up 39% from its 16 May one-year traded low of £9.56. And it is only 2% off its 6 February 12-month traded high of £13.48.
So, is it worth me buying it at the current price?
Price and value are not the same
Some investors think little value can be left in a stock after a significant price rise. Others believe they should jump on a rising share to capitalise on continued momentum.
As a former senior investment bank trader and longtime private investor, I think neither view helps in optimising investment returns. I know price and value are not the same. So my only question on any stock is whether there is any value left in it.
To begin to answer this question for Sage Group, I note it is currently trading at a price-to-sales (P/S) ratio of 5.5. This is bottom the group of its peers, which averages 9.2. This comprises Salesforce at 8.3, Oracle at 9, SAP at 9.5, and Intuit at 9.9.
So Sage group looks very undervalued on this measure.
The same is true of its 11.8 price-to-book (P/B) ratio compared to the 14.4 average of its competitors. And it is also the case with its 40.1 price-to-earnings (P/E) ratio against the 63.7 peer group average.
However, the second part of my standard stock price evaluation process highlights it may actually be seriously overvalued now.
This method involves looking at where any stock’s price should be, based on future cash flow forecasts for a firm.
The resulting discounted cash flow analysis using other analysts’ figures and my own shows Sage Group shares are 18% overvalued at £13.26.
Therefore, the fair value of the shares is technically £11.24, although market moves could push them higher or lower than that, of course.
Is it a growing business?
This DCF overvaluation suggests to me that more future cash flow growth has been factored into the share price than is merited.
However, this does not mean that the company is not growing strongly or that it will stop growing any time soon.
It may just be that investors have piled into the stock given its rarity as a FTSE 100 technology share. The same could be true of some or all its competitors too, given their comparatively high P/S, P/B, and P/E ratios.
In fact, Sage Group’s Q1 2025 results released on 30 January showed total revenue increasing 10% to £612m.
A risk to future growth is the high level of competition in this sector. Another is a recession in its key North American and European markets that would hit its core small- and medium-sized enterprises clientele.
Will I buy the stock?
Given its DCF overvaluation, I will not be buying Sage Group shares now.
However, it is on my watchlist as a good technology stock to review if its price comes down.
This post was originally published on Motley Fool
