By:
Matt Tully, AIM Student at Marquette University
Disclosure:
The AIM Equity Fund currently holds this position. This article was written by
myself, and it expresses my own opinions. I am not receiving compensation for
it and I have no business relationship with any company whose stock is
mentioned in this article.
Summary:
• Paycom Software, Inc. (NYSE:PAYC) is a SaaS company that provides
human capital management (HCM) software solutions for small to medium sized
businesses. PAYC provides functionality to these businesses that need to manage
employees from recruitment to retirement.
• PAYC reported a very
strong 3Q in 2018. It is clear that management expects to continue growing at a
rapid pace.
• PAYC has officially
increased their target employee count. Sales representatives can now seek out
companies with 50-5,000 employees (up from 2,000 as the maximum).
• Paycom’s business model
is still extremely strong. Recurring revenue is still ~98% and revenue growth
is estimated to be 27% for 2018.
Key
points:
Paycom Software has posted significant revenue growth
the past two quarters (32% in 3Q18). Recurring revenue, a significant part of
PAYC’s business model also outperformed for the second straight quarter.
Additionally, Paycom has already opened four offices in FY18 compared to only 3
in FY17. This is evidence that the high growth rate estimates (~25%) are
sustainable for the future.
During the 3Q18 earnings
call, management announced that they plan to target larger clients in the
future. They currently target companies with 50-2,000 employees, but they are
experiencing an increase in interest from larger firms. This will help drive
revenue as Paycom incorporates client usage when they are charged for the
service. Hence, a client with more employees would result in an increase in
usage.
Paycom Software Inc.
still has an extremely effective business model. Nearly all revenue is
recurring month to month and they are experiencing revenue growth above 25%.
The street estimates recurring revenue for Paycom to be $551 million and $692
million in 2018 and 2019, respectively. Meanwhile, the operating margin
adjusted for stock based compensation for those years are estimated to be 36.6%
and 37.4%.
What
has the stock done lately?
With technology stocks
getting hit hard lately, PAYC’s price has been down the past two months. In
early September, the stock was trading above $160 and is now trading at
$125.12. I think that this is a bit of an overreaction to the market as a whole
and see PAYC turning it around in the short-term. I think the catalyst of
targeting larger customers will help for long-term growth as well. As they
transition to larger customers, they will see an increase in revenue as their
platforms will have more usage on them.
Past
Year Performance:
PAYC has increased 58.5% in value over the
past year. As I touched on in the previous section, it was trading above $160
only two months ago. The large increase in value is due to the fact investors
like the revenue visibility and high growth that PAYC provides. I think the
recent decline in share price is an oversell, and look for PAYC to bounce back
soon.
Source:
FactSet
My
Takeaway:
PAYC is currently trading at a P/S multiple of 13.5x.
When this stock was first pitched, the target multiple was set at 10.8x which
resulted in a price target of $100.00. I think it is clear as to why this
company is trading at such a high multiple (recurring revenue, high margins,
significant growth) and I expect it to continue. I hope to see the PAYC share
price bounce back after what I predict was an oversell by investors. I think
the AIM Small Cap Fund should set a new price target for PAYC at $140.
