Paycom Software (PAYC -0.30%) has been a perennial wealth creator. The cloud-based payroll-software provider has delivered a staggering 30% annualized return since its initial public offering (IPO) in 2014 (1,170% overall). That has absolutely pulverized the S&P 500‘s return (155% or 10.1% annualized).
However, Paycom stock has fallen on hard times this year. Shares have lost one-third of their value over the past year and plunged 45% from their 52-week high. That has been an abysmal performance compared to the S&P 500, which has rallied 24% this year. Here’s a look at what has weighed on Paycom stock and whether now is a good time to buy the dip in the cloud stock.
Beti is too good
Paycom has helped revolutionize the payroll sector. It was one of the first companies to bring the industry online. It has since launched Beti (better employee transaction interface), an industry-first solution that empowers employees to do their own payroll. Beti helps employees find and fix costly errors, saving companies time and money.
Since launching in mid-2021, Beti has been a growth driver for Paycom. Revenue and earnings have grown briskly, while retention has steadily ticked higher. Paycom’s revenue rose 21.6% in the third quarter to $406.3 million. Meanwhile, its net income improved from $52.2 million, or $0.90 per share, to $75.2 million, or $1.30 per share.
Customers absolutely love Beti. Nearly two-thirds of its clients have made the move to Beti. It saves them time and money because they no longer need to fix payroll errors resulting in manual checks, voided checks, direct deposit reversals, and additional wires.
However, while Beti is saving clients money, it’s starting to cost Paycom in related-service revenue. CFO Craig Boelte pointed out on the company’s Q3 conference call that while its revenue rose 22% compared to the prior year, “that came in below our guidance range as a result of lower-than-expected service revenues and unscheduled payroll runs.” The CFO noted that:
Beti adoption and usage creates tremendous value to clients as they experience perfect payrolls and eliminate errors, corrections, and unscheduled payrolls, which would otherwise be billable items. In addition, our CRR (client relations representative) teams continue to focus on Beti adoption and overall system usage, which resulted in lower cross-selling revenues.
Down, but plenty of catalysts to reaccelerate
Beti will act as a growth headwind over the next year. Paycom trimmed its full-year outlook and now sees revenue rising 22% in 2023. That’s down from the 24% growth rate initially expected this year. Meanwhile, it expects growth to slow further in 2024 to a range of 10% to 12%.
However, the company continues to invest heavily in innovation, sales, and marketing. Those investments should help reaccelerate growth in the future. For example, Paycom continues to launch new products. It recently launched its global human capital management solutions platform, enhancing its ability to expand internationally. The company also launched Everyday (allowing users to get paid daily without costly fees) and GONE (automating time-off request decisions). On top of that, the company has a long growth runway ahead for Beti and its other products since it has only taken about 5% of a large and expanding total addressable market.
Meanwhile, following its sell-off, Paycom trades at a much more reasonable valuation. It sells for less than 27 times its forward price-to-earnings (PE) ratio. While that’s a bit more expensive than the S&P 500 (21.4 times forward earnings), it’s cheaper than the Nasdaq (28.8 times forward earnings). Paycom also boasts having a pristine balance sheet ($484 million in cash against $29 million in debt) and a cash-flowing business. That’s allowing it to return more money to investors. Paycom initiated a dividend earlier this year (currently yielding 0.7%) and repurchased over $76 million of its cheaper stock during Q3.
A high-quality company on sale
Beti has become a major cost saver for Paycom’s clients, so much so that it’s starting to cut into some of the incremental revenue the company has earned from fixing payroll problems. While that will drag on its growth in the near term, growth should reaccelerate in the future, especially as it wins over more new customers to the solution and continues to innovate. In the meantime, shares of this high-quality company trade at a much more reasonable value, making the dip look like an attractive buying opportunity.
