It's been a tough year for Paycom Software (PAYC 1.42%) shareholders. The stock price has been cut in half from last August's peak, and despite the company's recently reported earnings beat, it's still trending downward. Investors just aren't interested in owning this particular software stock even though others of its ilk are rallying.
The funny thing is, this company's doing well, and should continue growing for the foreseeable future. That means Paycom stock's recent weakness is a long-term buying opportunity. There's enough potential upside here, in fact, to say Paycom Software could help you become a millionaire someday.
Paycom Software, up close and personal
It's not exactly a household name. Indeed, it's so far off the beaten path that you may have never even heard of it.
Don't let your lack of familiarity with its business dissuade you, though. Paycom is a profitable $10 billion company that regularly logs double-digit percentage growth in a market that is also expected to keep growing at a double-digit percentage pace annually for at least several more years.
That market is the human resources management software space, by the way. Paycom's platform helps enterprises effectively manage all aspects of recruiting, hiring, and paying employees within a single cloud-based platform. Timeclocks, benefits administration, background checks, and payroll tax management are just some of the duties its software can handle, making increasingly complicated human resources matters much easier for employers to handle.
NYSE: PAYC
Key Data Points
It's not exactly a new idea. Paycom's first platform was launched back in 1998 when the web was still relatively young. Other HR software companies have materialized in the meantime, such as Workday, Monday.com, and Paychex. There's certainly plenty of competition.
There's also plenty of business to go around, however. Paycom Software's top line grew by 23.2% to nearly $1.7 billion in 2023, driving its adjusted (non-GAAP) earnings up from $6.14 per share in 2022 to $7.75 per share.
Its growth is expected to bump into a headwind this year. Specifically, analysts believe Paycom's revenue growth rate will slow to only 10.6%, while earnings are actually expected to fall to $7.68 per share. Economic uncertainty and even the prospect of a recession appear to have the analyst community worried about demand for HR software, and understandably so. This anticipated slowdown for the business could be the key reason why Paycom Software stock has been such a lousy performer of late. In fact, Paycom lowered its revenue guidance significantly back in late October when it delivered its third-quarter results, which is why the stock took such a big hit in the following session.
But it's worth taking a step back and looking at the bigger picture.
The market really is missing the bigger picture here
Investors' concerns and the stock's subsequent weakness do make sense. Even with their recent weakness, shares are still richly priced at more than 30 times trailing earnings. For comparison, the S&P 500's trailing and forward price-to-earnings ratios are both just over 22, and the S&P 500's earnings are expected to grow this year. Shrinking (or even stagnant) profits make it tough for a company like Paycom to maintain a premium valuation even if its revenue is still growing nicely.
Consider this, however: Paycom Software has topped earnings estimates in each of its past 14 reported quarters -- and by more than just a little. Given its history of providing investors with pleasant surprises, it's not a stretch to suggest that the analysts' consensus is again underestimating what's actually in store for Paycom's bottom line. Ditto for its top line.
The backdrop is certainly encouraging enough. Despite a handful of economic red flags now waving, the human resources market is still expected to grow this year, and then continue growing for a long while. Mordor Intelligence has projected annualized revenue growth of 11.1% through 2029 in the space, which jibes with a forecast from Technavio.
So while Paycom's projected sales growth of just over 10% this year would be markedly slower than last year's growth pace, it should only be a short-term lull. Analysts are modeling for revenue growth of 12.4% to $12.1 billion next year, which should push profits up to an impressive $8.78 per share. Both of those figures would be records for the company, and perhaps more importantly, both would just be a taste of what's to come.
Paycom Software is certainly well positioned to continue capturing more than its fair share of its market's growth, distinguished by features like a self-service app for its customers' employees and a focus on serving smaller enterprises that are often overlooked by larger HR software companies.
Act sooner rather than later
Don't read too much into the message. Paycom isn't the kind of stock an investor should own as a core, foundational holding of their portfolio. For those kinds of holdings, look to stalwarts with not only clear long-term growth ahead, but obvious market leadership. Think names like Microsoft or Procter & Gamble.
However, for investors who have both time and a bit of tolerance for risk and volatility, Paycom Software is a prospect worth considering for the more adventurous corners of your portfolio. The market is seeing the Paycom glass as half-empty right now, but given enough time, the company's strong growth will be reflected by the stock price. You'll want to be early rather than late to that party so you can capture all of any brewing rebound.
