The Fair Value of Sage Group plc (LON:SGE): A DCF and Comparative Valuation Analysis

The Sage Group plc (LON:SGE), a global leader in accounting and financial software for small and medium-sized businesses (SMBs), has demonstrated robust financial performance in 2025. Total revenue for the nine months ending June 30, 2025, grew by 9% year-over-year to £1.862 billion, driven by a 22% surge in cloud-native revenue to £645 millionSage Group Plc reports 9% revenue growth, reaffirms FY25 outlook^[4]. Despite these strong fundamentals, the company's stock price of 1,070 GBX has drawn scrutiny regarding its fair value. This analysis evaluates Sage's valuation through discounted cash flow (DCF) modeling and comparative metrics, offering insights for investors.

DCF Valuation: A Tale of Assumptions

The DCF approach hinges on forecasting free cash flows (FCF) and selecting an appropriate discount rate. Sage's recent financials present a mixed picture. While annual FCF for 2024 reached £0.61 billion—a 30.14% increase from 2023—the most recent quarterly FCF for March 31, 2025, was reported at £0.00Sage Group (The) PLC (LSE:SGE) DCF Valuation - GuruFocus^[3]. This discrepancy underscores the importance of modeling assumptions.

Alpha Spread's DCF model estimates a fair value of 795.51 GBX per share, implying a 26% overvaluation at current pricesThe Sage Group (LON:SGE) Statistics & Valuation Metrics^[1]. This calculation assumes a five-year FCF projection discounted at a rate derived from the company's risk profile. Conversely, Simply Wall St's two-stage DCF model, using a 9.2% cost of equity as the discount rate, arrives at a fair value of £10.34 (or 1,034 GBX), suggesting the stock trades near intrinsic valueA Look At The Fair Value Of The Sage Group plc (LON:SGE)^[2].

The sensitivity of DCF results to discount rate assumptions is stark. A higher rate, such as the 11% long-term market average proposed by GuruFocusSage Group (The) PLC (LSE:SGE) DCF Valuation - GuruFocus^[3], would further depress the fair value estimate. Meanwhile, valueinvesting.io's DCF model, employing a WACC range of 7.7–10.0% and a 3.0% long-term growth rate, yields a fair price of 603.75 GBX—a 43.6% downside from current levelsSGE.L DCF Valuation | Sage Group PLC (SGE.L) - valueinvesting.io^[5]. These divergent outcomes highlight the need for rigorous input validation and scenario analysis.

Comparative Valuation: Benchmarking Against Peers

Sage's valuation multiples offer additional context. The company's trailing P/E ratio of 31.11 and forward P/E of 23.67The Sage Group (LON:SGE) Statistics & Valuation Metrics^[1] compare favorably to the UK Software industry average of 33.1x and peer average of 34xSGE.L DCF Valuation | Sage Group PLC (SGE.L) - valueinvesting.io^[5]. Its EV/EBITDA ratio of 19.78The Sage Group (LON:SGE) Statistics & Valuation Metrics^[1] is elevated relative to the UK Software industry's EV/EBITDA of 15.3xThe Sage Group (LON:SGE) Statistics & Valuation Metrics^[1], but this reflects Sage's strong operating margins (23.2% in H1 2025Sage Group (The) PLC (LSE:SGE) DCF Valuation - GuruFocus^[3]) and growth in recurring revenue streams.

The P/S ratio of 4.19The Sage Group (LON:SGE) Statistics & Valuation Metrics^[1] is in line with industry norms, though investors should note that Sage's cloud-native revenue—growing at 22% year-to-date—commands a premium in the market. Analysts at Simply Wall St suggest a fair price of £13.38SGE.L DCF Valuation | Sage Group PLC (SGE.L) - valueinvesting.io^[5], implying significant upside if the company meets growth forecasts of 7.9% annual revenue and 12.8% earnings growthA Look At The Fair Value Of The Sage Group plc (LON:SGE)^[2].

Investment Implications

Sage's financial performance—marked by disciplined cost control, a 13% increase in cloud product revenue, and a 115% cash conversion rateSage Group (The) PLC (LSE:SGE) DCF Valuation - GuruFocus^[3]—supports its growth narrative. However, the DCF analysis reveals a critical dependency on discount rate assumptions. A 9.2% cost of equity aligns the stock with fair value, but higher rates (e.g., 11%) would necessitate a reevaluation of its risk profile.

Comparatively, Sage's valuation multiples suggest it is neither overvalued nor undervalued relative to peers, though its EV/EBITDA premium reflects confidence in its operational efficiency. Investors should monitor the company's ability to sustain cloud revenue growth and maintain margins amid macroeconomic headwinds.

Conclusion

The fair value of Sage Group plc remains a nuanced question. While DCF models produce a range of outcomes, the company's strong cash flow generation, recurring revenue model, and favorable peer comparisons suggest it is reasonably valued. Investors should weigh the assumptions underlying DCF models and consider Sage's strategic positioning in the cloud software sector before making decisions.