Since the stock peaked in late 2021, payroll and human resources software provider Paycom(NYSE: PAYC) has been a disaster for investors. Shares are down a whopping 74% from that all-time high, and they've shed nearly 30% this year alone.
Paycom's business is tied to hiring trends and the state of the labor market, so ebbs and flows aren't uncommon. But one thing that has investors spooked is a big slowdown in growth caused in part by a newer product line.
Putting customers first
Paycom's Beti, which enables employees to do their own payroll and can greatly reduce the number of errors and issues in the payroll process, is a double-edged sword for the company. While Beti delivers immense value to Paycom's customers, it has also reduced demand for some of Paycom's other services. "Now that more clients are achieving the ROI that Beti has to offer, it has eliminated certain billable items, which is cannibalizing a portion of our services and unscheduled revenues," said Paycom CFO Craig Boelte last year.
The impacts of Beti combined and an uncertain economic backdrop led to Paycom's revenue growing by just 11% year over year in the first quarter of 2024. Revenue growth for the full year will be about the same, according to the company's guidance.
While 11% revenue growth isn't terrible, it's a far cry from what Paycom investors are used to. Excluding the early pandemic when layoffs and furloughs were the norm, Paycom has historically managed a revenue growth rate of 30% or higher.
Profits and valuation make Paycom a buy
While Paycom's growth rate is unimpressive at the moment, the company expects Beti and the value it provides to customers to drive revenue and profits higher in the long run.
It's important to note that Paycom remains a highly profitable company. Unlike some other subscription software companies, Paycom puts profits front and center. The company produced an adjusted net income of $147 million on $500 in revenue during the first quarter, good for a net income margin of nearly 30%. Free cash flow came in at about $100 million for the quarter.
Paycom's market capitalization has declined from about $32 billion at its peak to just $8.5 billion today. Based on the average analyst estimate for full-year earnings, Paycom stock trades at a price-to-earnings ratio of about 19. That valuation seems perfectly reasonable to me.
Paycom is taking a risk with Beti, but the company's willingness to endure some short-term pain to ensure it stays ahead of the competition should be music to investors' ears. Paycom's value proposition is much stronger today with Beti than it was without, and that should lead to continued market share gains.
Paycom has almost always been an expensive stock, so the current dip represents a rare opportunity to invest in this innovative software company at a reasonable price. It may be a bumpy ride, but Paycom's solid profitability, potential for revenue growth acceleration, and attractive valuation should lead to a great result for long-term investors.
Should you invest $1,000 in Paycom Software right now?
Before you buy stock in Paycom Software, consider this:
The Motley Fool Stock Advisor analyst team just identified what they believe are the 10 best stocks for investors to buy now… and Paycom Software wasn’t one of them. The 10 stocks that made the cut could produce monster returns in the coming years.
Consider when Nvidia made this list on April 15, 2005... if you invested $1,000 at the time of our recommendation, you’d have $704,612!*
Stock Advisor provides investors with an easy-to-follow blueprint for success, including guidance on building a portfolio, regular updates from analysts, and two new stock picks each month. TheStock Advisorservice has more than quadrupled the return of S&P 500 since 2002*.
*Stock Advisor returns as of June 3, 2024
Timothy Green has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Paycom Software. The Motley Fool has a disclosure policy.
