The Sage Group Has A Good Product, But The Stock Is Too Expensive

seekingalpha2024-10-15

The Sage Group develops and sells accounting and finance software for small and mid-sized businesses.The company's products are qualified on par with competitors like Quickbooks, Xero, and NetSuite. ...

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H","collect":0,"end_time":0,"defaultTopTitle":"seekingalpha.com","property":[],"viewcount":null,"language":"en","relate_stocks":{"SGGEF":"Sage Group plc (The)","BK4023":"应用软件","SGPYY":"Sage Group plc (The)"},"translate_title":"Sage Group有很好的产品，但库存太贵","themeId":null,"isJumpTheme":false,"ttsUrl":null,"symbols_score_info":{"SGGEF":0.9,"SGPYY":0.9},"content_text":"The Sage Group develops and sells accounting and finance software for small and mid-sized businesses.The company's products are qualified on par with competitors like Quickbooks, Xero, and NetSuite. However, the company lags behind its peers in growth.Because of recent positive performance, Sage's stock doubled in the past two years. This level of growth does not seem sustainable.The stock is currently expensive, with a P/E of 40x, requiring significant growth just to break even. This is not justified by the company's history or current positioning.filadendron The Sage Group plc (OTCPK:SGGEF) (OTCPK:SGPYY) develops and sells accounting and finance software for small and mid-sized businesses. Accounting software is an interesting category with positive economics, mainly coming from switching costs and network effects. The company's products stand out well against the competition in peer reviews, but the company has so far lagged in terms of growth and is not the incumbent. Because of improved margins and growth in the past two years, Sage's stock has significantly repriced towards higher multiples. Although these multiples are still below those of peers, I do not think the name is an opportunity. The yield on current earnings is low, and recent growth was largely driven by price increases rather than product adoption, making it less sustainable in the future. Current prices require a lot of growth ahead, which is not justified by the company's history. I believe The Sage Group is a Hold. Company intro and competitive dynamics Accounting software for SMBs: Sage offers a series of software products for SMBs to manage their accounting and finances. These are not super complex software programs but allow businesses to automate some of their invoicing, payables, bank consolidation, payroll, etc. The company covers the whole stack, from freelancers to mid-sized businesses with up to 2,000 employees and international operations. Its leading product, Sage Intacct, is focused on the bigger sizes in this range. Regarding geography, it is a primarily European company (27% of revenues from Europe, 22% from the UK), with a strong presence in the US (44% of revenues). One of the three leaders but lagging: Besides Sage, businesses can choose from Intuit Inc.'s (INTU) Quickbooks, Xero Limited (OTCPK:XROLF), or other smaller competitors focused on small and mid-sized businesses. Larger companies can also choose offerings from Microsoft or Oracle. Sage is about the same size as Xero, whereas Intuit's small business segment made about five times more revenue than Sage in 2023 (10-K, Segment Information). Despite an ok competitive position (the three products are similarly compared in peer review sites like G2), the company has significantly lagged its competitors in growth. Data by YCharts Positive but also challenging economics: The economics of accounting software are interesting for a few reasons. However, some positive aspects of these economics play in favor of Sage's competitors, particularly Intuit. First, the product is highly scalable, and costs are pretty leverageable. This helps the most prominent players, of which Sage is one, particularly in European markets. However, it disproportionately benefits Intuit, which can spread a much higher R&D budget over more customers. Sage's R&D is about GBP 330 million, whereas Intuit's is closer to $2 billion. Second, the products simplify a critical and tedious task but are not particularly expensive (for example, $10 to $100 a month for small businesses, with differentiated pricing for mid-sized companies that potentially start at $1,000). The pricing is less than a day or two of an accounting employee's salary in a developed country. This allows Sage and its peers to price their products with a lot of leeway. The customer is probably not looking to save every penny on the product. Third, accounting software products have some degree of switching costs. Once a business already started working with some software, changing to another one would require some data migrations, process modifications, etc. Unless the advantage of switching is large enough, the client will remain using the same software. This again helps the incumbents (with Sage being one but not the largest). There is also a caveat, and that is that small businesses can go out of business more easily than large ones, meaning there is some rotation in customers. Finally, the product has network effects, particularly among accountants. If accountants in one country, region, or industry learn to use one specific software, they will probably ask or recommend that their clients use that software, too. Again, this benefits the incumbents. Sage's strategy is mid-size: Sage aims to fill the somewhat vacant space of mid-sized companies. Intuit's QuickBooks is more geared towards small businesses (its webpage doesn't even mention mid-sized businesses prominently), and the competitors in mid-sized (Microsoft's Dynamics or Oracle's NetSuite) belong to larger companies with a lower focus on the market and need bigger prey to make a dent on earnings. Sage wants to win the mid-sized company by offering more automation (something critical for companies processing thousands of entries) and by expanding the product offerings to payroll, HR, finance forecasting, international operations, etc. Going for mid-sized businesses makes some sense: the space is more vacant, and these companies are more durable. On the other hand, the bigger the company, the more complex the sale process is, which tends to require different capabilities than selling off-the-shelf SaaS products. Valuation Gap with peers: Sage is priced below Intuit or Xero in terms of comparable metrics (EV/S or EV/EBITDA). The reason, as seen above, is that Sage has grown much more slowly than its peers. Its profitability margins are similar, although again, somewhat lower. Data by YChartsData by YCharts Recent growth durability: The company's valuation has increased significantly in the past two years (its stock price increased almost 100% between late 2022 and early 2024). This has been the result of low double-digit growth coupled with margin expansion. The margin expansion makes sense coupled with growth based on operational leverage, as mentioned in the economics section. However, I'm somewhat less confident about the durability of growth. From the company's earnings calls, we learn that it has increased prices by about 5% for the past three years, or about 16% compounded. If we compare the company's TTM revenues to 2021, growth is about 15%. This means most growth in the past few years has come from pricing rather than net customer expansion. In fact, with a net retention of about 102% in the past few years, the company lost customers. Net retention is current year revenue over the previous year's revenue from existing customers. If there's a price increase of 5%, the company only needs to keep 97% of customers to generate a net retention rate of 102%. I fear that the above price-led growth was only possible during generalized inflation, which helped the company leverage its income statement. With UK, EU, and US inflation now around or below 3%, it will be harder for Sage to grow from this. Valuation is high even assuming positive improvements: Sage currently trades for a market cap of about $13 billion, compared with a net income of $335 million or a P/E close to 40x. Such valuations require significant growth to justify them. For example, assuming all profits are paid as dividends (with no further tax on dividends for simplicity reasons), that there is no cost of time (benefiting the growing business), and that the growing business is sold at a P/E of 20x, a 40x P/E business has to grow 12% for ten years only to return to the same as a 10x P/E stagnant business. Can we justify such a level of double-digit growth in the future for Sage? It is hard to do, given that historically the business has grown much more slowly and that the recent spur of growth seems more related to (one-time, inflation-driven) pricing adjustments than to customer acquisition. Data by YCharts Conclusions Sage is an interesting business with a strong but not leading position in accounting software for SMBs. The company's strategy seems correct, opening a space in the less serviced mid-sized segment. Still, the lag against peers is a sign of competitive challenges. Despite the positives, the stock trades too dearly to be considered an opportunity. At current multiples, it needs to grow double digits for a decade in order to return the same as a stagnant business. The company's distant and recent history, and comparison to peers, do not justify this optimism. For that reason, I believe Sage Group is a Hold at these prices.  Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. 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