Sage SGE reported in-line revenue growth and fiscal 2025 guidance but delivered an impressive increase in operating margin that beat company-compiled consensus. Shares were up around 17% intraday on Nov. 20.

Key Morningstar Metrics for Sage

• Fair Value Estimate: £10.00
• Morningstar Rating: ★★
• Economic Moat: Narrow
• Morningstar Uncertainty Rating: Medium

Why it matters: Incremental margin improvement was expected as the company scales its software solutions. However, Nov. 20’s result is a big step up and may indicate a much quicker margin progression going forward. Fiscal 2024 operating margin improvement was 220 basis points versus consensus of 140 basis points. Our estimate was similar to consensus.

The bottom line: We raise our fair value estimate to £10.00 from £8.80 for narrow-moat Sage. After Nov. 20’s price movement, we continue to see shares as overvalued. We’ve raised our margin profile forecast and also tweaked our revenue growth estimates upward. We’ve accelerated our expected pace of margin improvement and lifted our ultimate maintainable margin level to 25% from 24%. We are encouraged by fiscal 2024 annual recurring revenue growth of 11% and think fiscal 2025 revenue growth guidance looks conservative.

Key stats: Fiscal 2025 guidance is for organic total revenue growth of 9% or above with a continual upward trend in operating margin in fiscal 2025 and beyond. Sage also announced a new GBP 400 million share buyback to be completed by June 2025.

Sage Group Stock vs. Morningstar Fair Value Estimate

Source: Morningstar Direct. Latest price as of Nov. 20, 2024, 4:30 PM GMT.

The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar's editorial policies.