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Paycom: Crushed Tech Stock With 20% Revenue Growth, 40% Profit Margins

Apr. 02, 2023 5:08 AM ETPaycom Software, Inc. (PAYC) Stock14 Comments


  • Paycom stock is down 40% from 2021 highs.
  • Unlike typical tech companies, Paycom is highly profitable with 40% adjusted EBITDA margins and 21.6% GAAP margins.
  • Management is guiding for 24% revenue growth this year in spite of a tough macro environment.
  • I discuss the risks and opportunities in the stock price today.
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Paycom (NYSE:PAYC) is a highly profitable tech stock with a payroll and HCM offering. PAYC stock has pulled back significantly from the 2021 highs as valuations had gotten ahead of themselves. The stock is now trading

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This article was written by

Julian Lin profile picture

Julian Lin is a financial analyst. He finds undervalued companies with secular growth that appreciate over time. His approach is to look for companies with strong balance sheets and management teams in sectors with long growth runways.

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Comments (14)

massive layoffs and competition will drag this thing down a lot. I'm seeing sub 200
@down_to_finance Haven’t seen anything about layoffs. Source?
Lorem Ipsum DSA profile picture
So if (I mean "when"... No, I mean "as") AI begins to replace some employees, is this bearish for Paycom?
Love the company, fantastic software, great service….but the valuation is still very lofty despite the correction….and NO Dividend
To your point on risks and Paycom investing in innovation. It certainly looks like not all the solution pieces are included but will be added to the offering. With most their customers in that mid-market segment it'll be interesting to see how long it'll take them to get a foothold in other countries. Either way it looks like Paycom is leveraging their lean R&D to meaningfully grow the TAM.

"Paycom is now able to expand access to users in more than 180 countries and is available in 15 languages and dialects."

Dividend Streamer profile picture
With Paychex and ADP trading at 26-28x forward earnings with mid teens earnings growth, it would seem that Paycom’s high 30’s PE along with 25-30% growth is somewhat comparable.

The payroll and HCM businesses are a very good place to be. Fantastic growth, sticky client base and even fairly defensive during an economic downturn.
Ghost of Graham profile picture
Thanks for the article which brought PAYC to my attention.

It screens well on fastgraphs, but that valuation...there no doubt will be multiple compression in the long term, so your return is the earnings growth fighting a falling PE. I prefer them to work together, like with STNE.

There's no telling where the multiple could land - 35x earnings, 30x earnings, less. Kind of reminds me of Amazon. But Amazon is worse, where both the earnings and the long term multiple are anyone's guess.

In terms of payments infrastructure, GPN is selling at 10x earnings or less. Hard to see much long term multiple compression there with earnings likely over 12% at least for the next decade.

The problem with buying great companies at a reasonable price is that you risk compression and you have no margin of safety. The problem buying good companies that are very cheap is that, as Monish says, you have to sit with the discomfort surrounding why it was so cheap in the first place. I prefer this short term discomfort.
Julian Lin profile picture
@Ghost of Graham I agree that the multiple is rich here, given where other stocks stand.
@Ghost of Graham Thanks for reminding me about StoneCo. I took a fresh look and it looks great! Why the depressed valuation? Looking ahead two years, it looks like an easy double without any multiple expansion. Why is Paycom given a premium multiple? I have a position in Paycom - it looks like moving that money into StoneCo may make sense.
Ghost of Graham profile picture
@lbeachmike paycom probably has its multiple because is has a clean record of growth and maybe because it's more US based, for all I know. But I don't know the company.

Stone Co has some knocks against it which it is still recovering from. It launched a loans program with its SMBs which it got taken advantage of with, basically, and had to pay off the losses. That's why the negative earnings in several recent quarters. The positive there is they pulled the loan business, fixed it, and are now bringing it back into the mix, so another revenue stream in the next quarters onwards.

Stone is also in Brazil, which has suffered economically for years. To me this is mostly due to the strengthening of the USD after Trump got elected, which makes Brazils GDP look worse than it is. The strong USD also hurts Stones earnings, which are partly reported in USD.

The interest rates in Brazil are also very high, which is either a sign of impending recession or a growing economy, or both. High interest rates encourage savers to save instead of spend, so it's not good for payments to merchants, which is like 85% of Stones business, something around there.

Last reason for low valuation is the new leader who is a green socialist anti business type of guy.

I love the company, it's like 12% of my portfolio and I expect it will do exceptionally well with its crazy revenue growth rates and vrry cheap valuation once fears shift to new media cycles. But... we'll see.
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