Will Paycom Software Stock Recover?

Payroll has been a pain point for businesses large and small for decades. The time it takes to input payroll data and the cost of fixing errors can be a drain on a company’s accounting department. Enter Paycom Software (NYSE: PAYC), the first company to bring self-service, automated payroll technology to the workplace.

Paycom’s platform allows employees to access and authorize their paychecks before they receive them, increasing payroll efficiency and saving time and money.

The benefits of the software drove high demand for Paycom’s products over the past few years, and it also drove up the share price. PAYC was trading at under $100 per share in early 2018, and then soared above $535 in October 2021.

Then came 2022, and PAYC, like most tech stocks, took a hit. The stock traded around $300 over the course of the year. But while many tech companies have turned it around in 2023, Paycom stock is going in the other direction. Paycom’s share price is down 47.8% year-to-date, including a steep drop over the past few months.

After Paycom announced its 3rd quarter earnings, it fell even further. Yet, while the company’s revenue didn’t quite match expectations, there was still solid sales growth during the quarter. Given the sharp sell-off, the company’s strong product line, and the opportunity to expand internationally, many investors are wondering if PAYC is undervalued.

So will Paycom Software stock recover?

Why Did Paycom Software Stock Go Down?

One of the main reasons for the decrease is that sales have slowed down. The company has had to reduce its guidance for the end of the year and for 2024. Analysts were looking for over 20% growth in both the 4th quarter and next year, but now management forecasts just 14% growth in the 4th quarter and 11% for 2024.

A slowdown in sales growth will never excite investors, but concerns have also risen that the company’s product lines are cannibalizing each other.

Paycom’s Better Employee Technology Interface (Beti) is a product that streamlines payroll. The company earns revenue from Beti through subscription payments, but it also earns transactional revenue from one-time payroll entries or from errors.

Unfortunately for Paycom, the efficiency of the software has drastically reduced the second type of revenue, because there are far fewer errors or manual entries with the software in place. Despite that conflict of interest, the company still managed $406 million in revenue in the 3rd quarter, up 22% over the same quarter of 2022. However, that growth still unperformed estimates by 1.16%.

GAAP net income was up 44% from $52.2 million last year to $75.2 million in the 3rd quarter. Paycom’s diluted earnings per share shook out to $1.30, 10% higher than what analysts had expected for the quarter. So while the company had solid financials for the period, the main reason for the decline is concern about revenue growth.

What Do Analysts Say About Paycom Software?

Out of 22 analysts who’ve given opinions on the stock, 14 still rate PAYC as a Hold at this point. There are no Sell ratings on the stock.

Not only do the other 8 analysts believe PAYC is now a buy, two of those analysts expect that the stock will outperform the market over the coming year.

The highest estimate predicts that Paycom shares will soar by as much as 151% to $400 over the year. The median estimate is much more grounded, projecting a rise of 19.6% to $190. The most bearish forecast for PAYC predicts it will drop 11.9% to $140 over the next 52 weeks.

Is Paycom Software Stock Undervalued?

While no analysts are declaring Paycom a sell at this point, it’s clear that there’s still some uncertainty around it.

Following a 70% plunge from its peak of just a few years ago, the company currently has a price-to-sales ratio of around 6x, and some believe PAYC is undervalued.

It’s clear that even after a respectable earnings report, investors are looking for more from Paycom before they are willing to buy in. Any excitement will mostly be tied to the company’s projections for a resumption of growth.

Paycom has grown at nearly triple the rate of the payroll and Human Capital Management (HCM) software industry over the past few years but may now be entering a plateau period.

It’s important to note that the company only accounts for around 5% of spending in the industry. Another potential growth avenue for Paycom is to expand its business beyond payroll to other avenues of HCM like onboarding, employee benefits, scheduling, and more. Paycom’s ambition is to become a one-stop shop for tasks that currently require multiple vendors.

Will Paycom Software Stock Recover?

Paycom is likely to recover long-term given that it is 33.1% undervalued according to a discounted cash flow forecast analysis.

The company has been largely focused on the US but Its release of Global HCM should catalyze international expansion.

This HR software will be available in 180 countries and compatible with 15 languages and dialects. Paycom expects to have Beti available to the same market shortly thereafter.

Even if global expansion and a broader software suite don’t immediately raise Paycom to 2021 levels, the company certainly appears to have multiple avenues for revenue growth over the coming years.

Paycom Software Stock: Buy or Sell?

Will they be enough to reward investors? Paycom definitely offers a unique opportunity, one that could have substantial upside according to analysts and a cash flows analysis.

Even though revenue has slowed down, the company has solid financials and the opportunity to grow by expanding its offerings and international presence.

It certainly appears now that the valuation declines have presented an opportunity to enter with a great margin of safety, and analysts largely agree that the path of least resistance in the medium-term is upward.

There’s a lot to like about Paycom for investors who may be willing to settle for short-term volatility in exchange for long-term potential.

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