Is Paycom Stock Undervalued?

After all the concerns raised about the emergence of artificial intelligence, humans are still an integral part of most businesses. That means payroll, a central fixture of accounting departments for decades, will continue to be essential because paying employees in full and on time keeps operations moving.

As the workforce becomes more remote and global, payroll has become much more complex, and managing payroll data and correcting errors can be costly.

To address those issues, Paycom Software (NYSE: PAYC), developed a self-service payroll platform that automates many of the central tasks of payroll operations.

The promise of Paycom’s platform attracted investors in droves in 2021, and drove the stock up nearly to $550 per share.

Unfortunately, the company has been a victim of its own success. Paycom’s newest platform has made the payroll process so efficient that, in many cases, customers haven’t had a reason to purchase the company’s other services.

As Paycom’s revenue growth stalled, investors began selling PAYC, to the point where the stock is now trading around well below its highs, a 30.5% year-to-date decline. However, the company had a strong first quarter with double-digit revenue growth that beat analysts’ expectations, and Paycom has continued to expand into international markets.

So is Paycom stock on sale?

Why Did Paycom Stock Go Down?

Paycom shares have dropped almost 24% since the company released its first quarter of 2024 earnings in May. That was after Paycom reported $500 million in revenue, up 11% year-over-year and 0.75% better than analysts expected.

The company’s GAAP net income of $247.2 million meant diluted earnings per share was $4.37. That was an over 100% improvement from the same quarter of last year, and it beat experts’ predictions by 5.45%.

Paycom had $371 million in cash and cash equivalents at the end of Q1, compared to $294 million last year. The company also has no debt.

All in all, Paycom had a successful first quarter where it made improvements in everything from operating income to gross margin.

However, the news that stuck with most investors was that Paycom lowered its guidance for the second quarter. The company’s leadership attributed the slowdown to continued inflation and high interest rates that have caused many businesses to scale back their demand for payroll services.

Paycom now expects revenue between $434 and $438 million, compared to earlier estimates of around $442 million. Investors responded to the news with a selloff.

Will Paycom Stock Go Back Up?

The lowered guidance might have been reason enough for investors to look elsewhere, but there are also concerns that the company’s product lines aren’t in sync.

Paycom’s Better Employee Technology Interface (Beti) allows employees to do their own payroll, and the platform has been touted to reduce payroll errors by 80% in many organizations.

Beti is a subscription service, but Paycom also earns revenue from correcting payroll errors for its clients. The efficiency of Beti has drastically reduced the latter type of revenue and hindered Paycom’s growth.

Recurring revenue accounted for $491.9 million of the company’s $500 million in revenue in the first quarter. However, it was a positive sign that recurring revenue increased 10.7% from the same quarter of 2023.

The shift to a subscription model hurt Paycom in the short term, but it could still pay off. The days of the company’s exponential growth might be over, but there is still plenty of room for Paycom to expand. The company only has around 5% of payroll management market share.

Paycom has aspirations to expand beyond its core payroll solutions and offer companies platforms for onboarding, employee benefits, and other HR-related tasks.

In early 2023, Paycom announced it would push international growth through its Global HCM platform, which made some of the company’s services available to 180 countries, and granted compatibility with 15 languages and dialects.

Paycom recently announced that Ireland would be the fifth country where Beti is available, after the U.S., the UK, Canada, and Mexico.

Paycom Software Analysts Ratings

While the company has avenues to expand, stagnating growth has caused Wall Street analysts to be reticent on PAYC. Out of 23 analysts who have rated the stock, 19 assess PAYC as a Hold.

There are four Buy ratings on the stock, including one analyst who believes Paycom shares can outperform the market in the next 12 months.

The highest forecast has PAYC skyrocketing to $250 per share, a 76% gain from where the stock currently trades.

The average price target is $181.15, which translates to a 27.5% increase over the next year. There isn’t currently a Sell rating on Paycom stock, but the lowest forecast has PAYC improving by 2.11% to $145 in the next 52 weeks.

Is Paycom Software Stock Undervalued?

The analysts might not be willing to call the stock a buy just yet, but the price targets leave room for respectable gains.

The continued selloff has left Paycom with a 17.3x price-to-earnings multiple, which brings PAYC in well below many of its tech stock competitors.

The stock is also trading nearly 75% lower than where it was just a few years ago. In addition, Paycom has an annual dividend yield of 1.06%, meaning PAYC holders receive a quarterly payout of $0.38 per share.

Is Paycom Stock Undervalued?

Paycom is 27.5% undervalued according to the consensus of 23 analysts who rate the stock.

Paycom’s move to a recurring revenue model was highly successful, so much so that it cost the company its other lines of revenue. But if the company can continue to expand Beti’s reach, and if macroeconomic pressures lift, Paycom may well be positioned strongly to capitalize.

The company had strong Q1 financials, beating expectations for revenue and earnings. Paycom is also a highly profitable company with plenty of cash and zero debt. However, it is concerning that the company dropped its Q2 sales guidance.

After the massive selloff, it seems like Paycom still has enough strong fundamentals to warrant interest from investors who are looking for solid companies that are trading at a discount but be wary of impending volatility.

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