Paycom has been on fire lately. In the past six months alone, the company’s stock price has rocketed 40.3%, reaching $217.39 per share. This was partly thanks to its solid quarterly results, and the performance may have investors wondering how to approach the situation.
Is now still a good time to buy PAYC? Or is this a case of a company fueled by heightened investor enthusiasm? Find out in our full research report, it’s free.
Why Does PAYC Stock Spark Debate?
Founded in 1998 as one of the first online payroll companies, Paycom (NYSE:PAYC) provides software for small and medium-sized businesses (SMBs) to manage their payroll and HR needs in one place.
Two Things to Like:
1. Customer Acquisition Costs Are Recovered in Record Time
The customer acquisition cost (CAC) payback period represents the months required to recover the cost of acquiring a new customer. Essentially, it’s the break-even point for sales and marketing investments. A shorter CAC payback period is ideal, as it implies better returns on investment and business scalability.
Paycom is extremely efficient at acquiring new customers, and its CAC payback period checked in at 8.6 months this quarter. The company’s rapid recovery of its customer acquisition costs indicates it has a highly differentiated product offering and a strong brand reputation. These dynamics give Paycom more resources to pursue new product initiatives while maintaining the flexibility to increase its sales and marketing investments.
2. Operating Margin Reveals a Well-Run Organization
Many software businesses adjust their profits for stock-based compensation (SBC), but we prioritize GAAP operating margin because SBC is a real expense used to attract and retain engineering and sales talent. This is one of the best measures of profitability because it shows how much money a company takes home after developing, marketing, and selling its products.
Paycom has been a well-oiled machine over the last year. It demonstrated elite profitability for a software business, boasting an average operating margin of 33.7%. This result isn’t surprising as its high gross margin gives it a favorable starting point.
One Reason to be Careful:
Projected Revenue Growth Is Slim
Forecasted revenues by Wall Street analysts signal a company’s potential. Predictions may not always be accurate, but accelerating growth typically boosts valuation multiples and stock prices while slowing growth does the opposite.
Over the next 12 months, sell-side analysts expect Paycom’s revenue to rise by 7.6%, a deceleration versus its 21.3% annualized growth for the past three years. This projection is underwhelming and suggests its products and services will face some demand challenges. At least the company is tracking well in other measures of financial health.
Final Judgment
Paycom has huge potential even though it has some open questions, and with the recent surge, the stock trades at 6× forward price-to-sales (or $217.39 per share). Is now the right time to buy? See for yourself in our comprehensive research report, it’s free.
Stocks We Like Even More Than Paycom
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