Sage commands a phenomenal rating, trading on 129 times last year's earnings per share, and 100 times this year's forecast earnings. The rating is partly justified by Sage's consistent earnings growth from its existing businesses. Sage's success at serving the bookkeepers of small businesses saw it deliver organic profits growth of 46 per cent, with overall operating profits rising 57 per cent to pounds 79.9m.
Something more is needed to support the shares, and that's the potential of Sage's customer base. Sage's accounting software is established as the standard for small businesses, with more than 2.2 million registered users. Some 650,000 of them signed up for Sage's support services. They delivered pounds 100m of revenues last year.
Sage's lead in accountancy has become a platform to build a small business services brand. The company yesterday said 100 companies a day log on to its website for its free design service. Now Sage is gearing up to rent its software on-line. A monthly charge of pounds 35, and a take-up by a third of the userbase, could double sales. It is set for US launch in April.
Sage's detractors, and Paul Walker, the chief executive say not every small business will be keen on hosting its accounts off-site. But with 200,000 new VAT registrations a year in the UK, Sage is exposed to a constantly rejuvenating market.
Sage is also moving into Spain and Italy, and the German business continues to post losses as Sage overturns its business model there.
It would take an announcement by Microsoft that it was tackling the small business market to knock Sage, but Sage's brand looks well-established. Analysts expect pre-tax profits of around pounds 100m this year, rising to pounds 129m in 2001, with per share earnings of 54.3p and 67.8p. The shares may not double for a while, but they have further to go and investors should not be tempted to take profits.