12 Stocks of Christmas: Sage

Sage (LON:SGE) has long been held up as a pillar of UK business. Indeed, in 2020 the company’s founder was knighted for his services to our nation’s commercial endeavours.

But it hasn’t always been a star performer in the UK stock market.

Sage was slower than its peers in the US to switch from a licensing to a subscription model. In 2019, when the likes of Intuit and Xero were making most of their revenue from recurring subscriptions, the equivalent figure at Sage was only 51%.

Like many software companies which have made the move from lumpy licensing revenue to subscriptions, margins have taken a bit of a battering along the way. And as Sage‘s transition came later and has taken longer, margins have been weaker than many of its peers.

The company also had a rough time during the pandemic. As it specialises in selling accounting software for smaller businesses (which were disproportionately affected by Covid-19 policies), sales were disappointing.

But in 2025, as Donald Trump marches back into the White House with promises to make small and medium sized American businesses (which contribute 39% of Sage’s top line) great again, the company is sitting in a good position. And its conversion to high margin subscription business has come good at just the right time.

Recurring subscription sales now account for 81% of revenues at Sage. The company’s annual recurring revenue for the year to September 2024 was £2.3bn, an increase of £277m on the previous year. What’s especially impressive about that growth is that it came from both new customers and the upselling of new products and services to existing customers.

Margin are also heading back towards the level investors like to see in software companies. At 19.4%, operating margins aren’t quite at the level achieved prior to the move away from licensing sales, but they’re back on the right track. US peer Intuit, which made the move to subscription before Sage, has reported an average operating margin of 24% over the last four years.

The company also ticks the quality boxes for profitability and cash generation. Return on capital employed has averaged 16% in the last five years and is rising, free cash conversion has averaged more than 100% in that time.

Management have deployed that cash into capital expenditure, especially in research and development. The company has increased its headcount of software developers of late, which is a good sign it’s investing for future growth.

This investment gave way to decent top line growth in 2024, with another 9% sales growth expected in 2025. What was especially impressive about the company’s sales growth last year was that it came despite a lower cost of sales. That means the company spent less to achieve more. If that can be repeated this year, margins will keep expanding.

Just like all of my picks for 2025, Sage shares don’t come cheap. But this is a long term compounder and if the company can keep growing margins and beating expectations, it should be rewarded with a multiple expansion which will support continued share price growth. 

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As have now arrived at the Twelfth Night, that brings to the end our 12 stocks of Christmas. Thank you to all our subscribers for joining in with your thoughts on our selections and contributing picks of your own. 

And so, on the twelfth day of Christmas, my true love sent to me:

Twelve shares of Sage (LON:SGE)

Eleven shares of Water Intelligence (LON:WATR)  

Ten shares of Serabi Gold (LON:SRB)

Nine shares of Billington Holdings (LON:BILN)

Eight shares of IG Design (LON:IGR)

Seven shares of Relx (LON:REL)

Six shares of Tristel (LON:TSTL)

Five gold MONY (LON:MONY)

Four shares of Character (LON:CCT)

Three shares of Impax Asset Management (LON:IPX)

Two shares of International Personal Finance (LON:IPF)

and a Garmin (NYQ:GRMN) in a pear tree!

You can read back through all our analysis via the Stock Pitch channel here. We will review our picks periodically, to see if we’ve picked some Christmas crackers or Christmas turkeys. Happy New Year!