Tuesday, March 2, 2021

A Small Cap Equity holding: Paycom Software Inc., PAYC, $412.98: “Pandemic Positives” by: Grace Flynn, AIM Student at Marquette University

 Paycom Software Inc., PAYC, $412.98: “Pandemic Positives”

By: Grace Flynn, 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.


• Paycom Software Inc. provides cloud-based human capital management software solutions to track employment life cycle, talent acquisition, and time and labor management. It only operates in the United States.

• Paycom grew by 14% from revenue and 17% from new customers from 2019 to 2020 and is now only selling software virtually.

• Margins are expected to incrementally increase due to the new “Better Employee Transaction Interface” (BETI) product payroll delivery feature that is expected to roll into the market in 2021.

• Certain features, like their DDX (Direct Data Exchange) tool and Manager-on-the-Go, had resulted in strong attach rates for new modules with new clients based on Q4 2020 results.

Key points: Paycom Software Inc. provides clients with HR technology to easily be able to track talent acquisition, payroll, time management, and talent management. They only operate in the United States and is headquartered in Oklahoma City, OK. Based on 2020 quarter 4 results, Paycom software grew tremendously and outperformed the market. 

At the end of 2020, Paycom Software Inc. reported $220.9 million in revenue, which indicates a growth of 14% based on 2019 results. This was unexpected as many people did not expect Paycom to outperform the market during Q4 2020. In addition to revenue, Paycom ended 2020 with 31,000 clints, representing a 17% growth rate compared to 2019. Companies management states that this growth can be due to inside sales. They were able to a take a strategic position with inside sales by becoming 100% virtual when it comes to sales. This cut down costs tremendously and increased performance. 

Analysts predict margins to grow after the announcement of their new feature “Better Employee Transaction Interface” (BETI) expected to enter the market in 2021. BETI delivers fully automated payroll functionally. With BETI, employees can now approve their own paycheck and be able to participate in payroll virtually. As banking is moving online, this is a very big step for Paycom and it will be hard for competitors to match that value proposition, according to management in their Q4 2020 Earnings Call.

Their disruptive innovations, like their DDX tool and Manager-on-the-Go, have proven to be successful based on 2020 sales growth and has indicated strong attach rates for new clients. DDX is a comprehensive management analytics tool that gives employers insight to efficiencies through HR technology. Manager-on-the-Go is an app that gives managers easy access to employee features. Management believes that new self-service initiatives drive a greater overall usage of the entire product. 

What has the stock done lately?

Due to new innovative features being available in the market, Paycom Software Inc. stock is up 1.39%. Their 52-week range is from $163.42-$471.08. Paycom has had a 38% surge in its stock price in the last 12 months and is expected to increase their margins further in 2021. Their lowest price was reported on April 3rd, 2020 at $163.42 while their highest for the year was on December 23rd, 2020 at $471.08. 

Past Year Performance: Paycom Software Inc. had a growth rate of 14.2% when compared to 2019 revenues and sales. The year -over-year increase was driven by new client additions. Gross Profit increased 14.5% from the past years at $188.9 million. In addition, EBITDA increased 7.2% from 2019 at $84.2 million. Paycom Software Inc. outperformed the market at the end of Q4 2020 indicating an opportunity for growth and innovation. It is expected to keep increasing in 2021. 

Source: FactSet

My Takeaway

In the past year, Paycom has innovated in order to grow at 14.2%, which is only expected to increase. Their recent innovations BETI, DDX, and Manager-on-the-Go give Paycom a feature and opportunity for growth beyond the benchmark as well as maintaining strong attach rates. Based on their past 2020 performance, they were able to overcome the pandemic. Management states that they had a slow sale growth from the pandemic around April but were able to combat lost sales by turning 100% virtual. This increased customer engagement and sales numbers for the end of 2020. Based on this growth rate and opportunity for 2021 growth, I would recommend we hold this stock to gain positive returns on it.  

Source: FactSet