Paycom (PAYC, Financial) went through its fair share of challenges during the pandemic. Its growth slowed given the lack of willingness of companies to upgrade or change their current Human Capital Management (HCM) systems.
However, since the beginning of 2021, the situation has changed for the better. Organizations have to deal with new dynamics such as a work-from-home culture, increased health and safety concerns and various other complexities. These complexities worked in favor of Paycom because organizations started adopting its cloud-based solutions that are simple and easy to integrate in order to help maximize employee productivity. As a result, Paycom has delivered a string of good results and its stock price has skyrocketed. Let us take a closer look at the company to see if its stock is a buy at current levels.
Company overview
Paycom was founded in 1998 and has its headquarters in Oklahoma City, Oklahoma. The company provides cloud-based payroll and human resource software solutions delivered in the form of a software-as-a-service (SaaS) offering. It provides comprehensive HR and payroll technology to enhance the employee life cycle from recruitment to retirement. In addition, the company offers personalized services to each of its clients by assigning a dedicated specialist for them in order to maximize retention.
Paycom has an edge over the competition because of its ability to simplify and streamline the payroll and human resource process. In addition, Paycom's software should see robust demand given that companies are making efforts to cut costs and increase efficiencies in the wake of the pandemic.
Strong customer stickiness
Paycom is focused on refining its product suite and attracting more and more global clientele. It is worth highlighting that customers in the HCM software business usually have a painful vendor switching process, which is why it is safe to assume that Paycom’s customer base is highly sticky. This will keep the company’s cash flows stable for future expansions. This is evident from the company’s Gross Revenue Retention rate (GRR), which is as high as 93%.
Another major green flag is that Paycom has a diverse customer base. It serves over 30,000 small and medium-sized businesses with minimal dependence on any one or two clients for a large chunk of its total revenues. With more and more small businesses adopting cloud-based technology, Paycom should benefit from the trend. As per Gartner estimates, the estimated SaaS spending growth is 19.30% for 2021 and 18.35% for 2022. Thus, Paycom should benefit from a highly favorable macro-economic environment.
The Beti upside
Paycom's new product Beti (Better Employee Transaction Interface), which was released recently, could be a significant growth driver, in my opinion. It was awarded the 2021 Top HR Product Honor. Beti is a first-of-its-kind technology that gives employees the power to manage their payroll. It is basically a software that puts the responsibility for an accurate payroll in the hands of employees, as payroll impacts them more than anyone in an organization. Employees using Paycom were already managing many components of their paycheck such as expenses, benefits, time cards and vacation requests, and with Beti, they can help process their payroll too. It enables HR to focus on more strategic endeavors by empowering employees to access, manage, view, approve and troubleshoot their paycheck before payroll is submitted.
With Beti, employees can identify and resolve mistakes in their payrolls and ensure 100% payday accuracy. It also minimizes the employer's liability, improves data accuracy, increases process oversight and gives employees an unparalleled insight into their pay. Beti can be a game-changer as it gives employees complete insight into their paychecks before payroll is run and provides them clarity on how their salary changes because of tax withholdings, expenses and promotions.
Beti works towards creating a process that gives employees confidence in its accuracy and increases their trust and engagement. It results in fewer steps in the process and elimination of data re-entry as employees resolve their payroll issues and reduces the payroll and funding fees for corrections and adjustments.
In their Q1 earnings call, Paycom forecasted a hundred pilot clients for its new product by the end of Q2, but Paycom surpassed that figure. As per CEO Chad Richison, the company sold Beti to over 1,000 new and existing clients by the end of July. Paycom is really looking to revolutionize the process of payroll through Beti.
Final thoughts
Effective management of human resources is pivotal for the success of any organization. The accelerated adoption of cloud-based HCM software solutions is the reason for the exceptional runup of Paycom that we can see in the above chart.
There is little doubt that the company offers a unique and easy-to-integrate suite of HCM solutions on a single database that can be accessed through a secure cloud network, which is what businesses love. With more and more businesses gradually shifting to the cloud, Paycom has immense scope for top-line growth.
However, its enterprise-value-to-revenue multiple of 33.1 and its price-earnings ratio of 178.06 are too high in my view, and there is no real scope for expansion on the multiples front. Given the high valuation, I believe that the company is a good watchlist candidate where investors can wait to enter at a better valuation.
