FTSE 100 company Sage‘s (LSE:SGE) shares have crashed 29% over the last year. A slump of that magnitude suggests a major problem or one that’s coming down the tracks at speed.
The thing is, I love buying quality shares on the dip. And especially when recent price action suggests the market has overreacted to something. So what’s happened here?
In this case, investors have heavily sold Sage due to AI-related worries, sending its share price lower. My view? The software giant is now one of the London stock market’s best value shares.
Why has Sage dropped?
We’re at the early stage of the AI era. But it’s clear this new technology will create significant opportunities for some companies.
But for Sage — which provides software for accounting, HR, and payroll functions — investors fear AI could have dire long-term consequences. They ask why businesses will pay for its software-as-a-service (SaaS) subscriptions when AI agents can quickly and cheaply automate accounting workflows.
These worries haven’t just hit Sage shares, though. The so-called SaaSpocalypse has caused scores of technology stocks to plunge in value over the last year.
However, in the case of Sage, I think these fears have been massively overstated. News last month provided the greatest indication yet.
What’s happened?
Even as broader AI adoption increases, business at Sage continues to boom. Annual recurring revenue and underlying sales both rose by double digits (up 11% and 10%, respectively) in October-March. Operating profit leapt 15%.
You see, Sage has a couple of major tools in its arsenal. CEO Steve Hare last month highlighted the first, commenting that
Small and mid-sized businesses trust Sage to run their mission-critical finance, payroll and HR workflows, where accuracy and compliance are non-negotiable.
He’s right. Though AI may be getting better at dealing with these critical activities, just how far will businesses be willing to farm these straight out to agents? I have severe doubts.
Seizing the AI boom
This brings me onto the second advantage Sage enjoys. It’s not sitting still and is investing heavily in AI itself. The result? As chief executive Hare says,
Eembedding AI directly into our customers’ day-to-day work [is] making our solutions more valuable, reinforcing our competitive advantages, and driving efficient, sustainable growth.
Sage has actually cited steps like expanding Sage Copilot and launching ‘intelligent agents’ as a reason for its accelerating sales and rising customer retention rates. Renewal rate by value rose to 102% as of March.
Stunningly cheap?
Despite this resilience, Sage’s shares have failed to spring higher. Even as the company raised sales guidance for the year. More fool the market, I say!
Why? Sage’s share price plunge leaves it on a forward price-to-earnings (P/E) ratio of 19 times. This suggests once-in-a-decade value for money in my view. Since 2015, the ratio has averaged between 30 and 31 times.
Like many UK shares, Sage could come under pressure if economic conditions worsen. But at current prices I think it’s worth serious consideration from savvy investors.
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Royston Wild owns shares in Sage.
