Paylocity: Why I Won't Be Paying For This Stock

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Kempano Investor
244 Followers

Summary

  • Paylocity is a provider of payroll and human capital management, or HCM, solutions servicing small- to mid-size clients in the United States.
  • Overall, I think that Paylocity has a robust solution that could effectively compete in the fierce competition.
  • Other competitors with more resources are ranked higher by reviews and thus will provide a substantial challenge.
  • Moreover, Paylocity is much more expensively valued than its most comparable competitor, Paycom, while having weaker margins and sales growth.
  • As a result of these factors, I set the recommendation for Paylocity to “Hold”.

Human resources

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Introducing Paylocity Holding

Paylocity (NASDAQ:PCTY) is a United Stated based cloud company that provides both payroll and human capital management ('HCM') solutions. The HCM solutions include time and attendance, recruiting software, workplace collaboration, and communication tools. They target mostly businesses with 10 to 5000 employees.

Industry Outlook

I believe that the payroll and HCM solutions industry is set to grow at a decent pace. There are a lot of digitalization trends in this industry that I expect to give the industry's expansion a boost. Certain important trends are:

  • COVID pandemic made employers aware of the digitization benefits of payroll and HCM solutions
  • Cloud transformation
  • The increasing need for cybersecurity
  • Need for employee Privacy
  • Incorporation of AI and automation into payroll and HCM solutions

According to Future Market Insights, the global market for payroll and HR solutions and services is anticipated to reach US$ 58.3 billion by 2032, growing at a healthy CAGR of 7.7%.

Competition

As the industry's outlook is excellent, many (potential) competitors are trying to take their slice of the pie. I believe that the Payroll and HCM solutions are a competitive and fragmented industry. For each of the products, Paylocity has many different rivals, but they are mostly payroll and HR software and service providers, including Automatic Data Processing, Paychex, Paycom Software, Paycor, Ultimate Kronos Group, and other local and regional suppliers:

Company

Business Description

Market Cap

Last Year's Revenue Growth

Paylocity Holding (PCTY)

Paylocity is a United Stated based cloud company that provides both payroll and human capital management ('HCM') solutions. The HCM solutions include time and attendance, recruiting software, workplace collaboration, and communication tools. They target mostly businesses with 10 to 5000 employees.

10.78B

13.24%

Paycom Software (PAYC)

Paycom is a rapidly expanding provider of payroll and human capital management, or HCM, software that primarily serves American companies with between 50 and 10,000 workers. Approximately 16,000 clients are served by Paycom, which was founded in 1998.

19.55B

25.44%

Paychex (PAYX)

Paychex is a well-known provider of insurance, human resources management, and payroll services, particularly to small and medium businesses in the US. Over 1 in 12 Americans employed in the private sector are employed by the 1979-founded corporation, which serves over 730,000 customers.

44.07B

13.68%

Automatic Data Processing (ADP)

ADP serves a wide range of organizations, from small startups to large multinational corporations, by offering payroll and human resource management solutions. Over 920,000 clients are served by ADP, which was founded in 1949 and is based mostly in the US.

92.05B

2.85%

Competitive Position

I believe that the following are the main competitive elements on which Paylocity competes in its market:

  • Products designed to engage with the workforce of today;

  • A complete platform for payroll and human capital management products;

  • Depth and breadth of the product's capability;

  • Solutions' configurability and simplicity of usage;

  • A contemporary, mobile, consumer-focused, and intuitive user experience;

  • Benefits of a platform for cloud-based technologies;

  • The capacity to develop and act quickly in response to customer demands;

  • Domain knowledge in HCM and payroll;

  • Customer service and implementation quality;

Most of these are directly or indirectly related to the customer experience using the solutions. Thus, I reviewed how the solutions are viewed by others:

In the G2 2022 Best Software Awards, Paylocity was listed among the Best HR Products and Best Software Products lists, appearing on both lists for the third year in a row. G2 states that

By combining consumer-oriented experiences with an automated all-in-one platform that streamlines and automates manual HR tasks, Paylocity clients are seeing better results in retention and engagement—ultimately driving business success.

The capacity to develop and act quickly in response to customer demands is evidenced by some of its product highlights. One example is the focus on new features related to workspace diversity and inclusiveness, according to G2:

Paylocity has added a range of enhancements across its platform to help inform and equip clients' diversity, equity, inclusion, and accessibility (DEIA) efforts. These tools provide HR professionals with data-driven insights to better understand their workforce's needs, foster a more inclusive employee experience, and measure impact.

While analyzing the Paylocity reviews, many aspects from the competitive elements list can be ticked off, such as the ease of use, intuitive one-solution platform, and depth of the product.

However, a lot of users have criticized its customer support. Moreover, multiple users have complained about changing account managers. One comment stated that they were on their third account manager in six months. This could potentially indicate a competitive environment for retaining employees.

While Paylocity seems to offer a robust solution, two competitors were listed higher in the G2 best HR products, namely ADP and Paycom.

These two competitors tick off most of the things mentioned on the competitive elements list. Paycom users are also more positive about its customer support. More interestingly, no users have complained about changing account managers.

Another factor potentially pressing on the competitive position of Paylocity is its much smaller market capitalization compared to its competitors, as seen in the previous section. Many of the rivals have access to more funding for the creation, marketing, and selling of their goods and services.

Overall, I think that Paylocity has a robust solution that could effectively compete in the fierce competition. However, I don't think Paylocity will dominate over its competitors due to its strong offering, reputation, and resources.

Valuation and Performance

I computed several valuation and performance-related statistics for Paylocity and its competitors:

Company

Forward PE

Gross Margin

Free Cash Flow Margin

3Y sales growth

3Y EPS growth

Debt / Equity

Paylocity Holding

73.53

66.04%

11.96%

19%

22%

0.13

Paycom Software

53.76

84.69%

19.11%

23%

16%

0.03

Paychex

27.78

70.59%

29.77%

7%

10%

0.29

Automatic Data Processing

28.49

42.38%

14.62%

4%

12%

0.79

Source: Seeking Alpha

Paylocity is the most expensively valued company among its peers but has the highest EPS growth and top 2 sales growth.

Paylocity's arguably most comparable competitor, Paycom, is much cheaper valued whilst having higher sales growth, lower debt levels, and much higher gross margin and free cash flow margin. The other two competitors are difficult to compare, as they are much cheaper but also have lower growth rates.

Final Take

I believe that the payroll and HCM application industry will grow at an attractive rate. In my opinion, Paylocity seems to offer a robust solution to capture a part of the market's opportunity. Nevertheless, other competitors with more resources are ranked higher by reviews and thus will be provide a substantial challenge. Moreover, Paylocity is much more expensively valued than its most comparable competitor, Paycom, while having weaker margins and sales growth. As a result of these factors, I set the recommendation for Paylocity to “Hold”.

This article was written by

Kempano Investor profile picture
244 Followers
I believe that the goal of investment analysis is to basically assess the risk/return ratio and conclude whether an investment is under, over, or correctly valued. I do this by first categorizing the specific investment (value/growth/other), following by an extensive analysis that would fit that category. Such an extensive analysis would consist of as many as possible relevant qualitative and quantitative aspects that might impact the return and or risk of a specific investment. I especially like writing about undercovered high-growth tech stocks. It fascinates me to unravel the mystery and potential of such a stock. However, I also enjoy switching it up, learning as much as possible about all types of investments, types of risks, types of returns for all types of investors. The markets have too many interesting investment opportunities, that it would be a waste to just focus on a small part of it.  My goal is to fairly, extensively, and accurately analyze investments and present them to my reader in such a way as well.

Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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