After 60% Rally, All Good News Priced In Paycom Stock?

by Trefis Team
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After a 61% rise since the March 23 low of this year, at the current price of around $289 per share, we believe Paycom Software’s stock (NYSE: PAYC) has nearly no upside left. Paycom’s stock has increased from $179 to $289 off the recent bottom, better than the S&P which  increased by around 50%. The rise in the stock price was helped by the Fed’s multi-billion dollar stimulus package announced on March 23rd which lifted market sentiments. Paycom, which provides online payroll and human resource technology, saw a further recovery after the Q1 earnings announcement as the company beat the consensus estimates for both revenues (up 21% y-o-y) and EPS (up 12% y-o-y), as they continued to add customers despite the pandemic. The company continued to see further growth as revenue went up by 7% y-o-y in Q2 2020.

The stock currently is 260% above the levels at which it was at the end of 2017 but is still below the pre-Covid (February 2020) high of $338. Currently, we believe that the company’s stock has nearly no upside left, as there is no clarity with regards to the abatement of the crisis. Our dashboard What Factors Drove 260% Change In Paycom Software Stock Between 2017 And Now? has the underlying numbers.

Some of the stock price rise in the 2017-2019 period is justified by the 70% growth in revenues. Paycom’s revenues increased from $433 million in 2017 to $738 million in 2019. This was offset by a decrease in net income margin from 28.5% in 2017 to 24.5% in 2019 though the Net Income increased by 46% in the period. On a per share basis, earnings increased by 47% from $2.13 in 2017 to $3.14 in 2019.

The stock price increased during this period as revenue and profits grew. The P/E multiple increased 38x in 2017 to 84x in 2019. The multiple shot up further and currently stands at 92x. We believe that the market has been optimistic about the cloud based software companies, which has led to the rise. There could be a downside risk in Paycom’s multiple, when compared to levels seen in the past years – P/E of 84x at end of 2019 and P/E of 52x in 2018.

Effect of Coronavirus

The global spread of coronavirus has led to lockdown in various cities across the globe, which has affected industrial and economic activity. This is likely to adversely affect consumption and consumer spending. Paycom’s stock is down by about 9% since January 31, after the World Health Organization (WHO) declared a global health emergency in light of the spread of coronavirus. However, during the same period, the S&P 500 index was up 4%. Despite the coronavirus pandemic the company saw a 7% growth in Total revenues for Q2 2020. 98% of the revenue is recurring in nature which is also an advantage. That said, lower consumer spending and consumption over the coming months could likely lead to lower demand for software and services.

In the coming weeks, we expect continued improvement in demand and subdued growth in the number of new Covid-19 cases in the U.S. to bolster market expectations. Following the Fed stimulus — which helped to set a floor on fear — the market has been willing to “look through” the current weak period and take a longer-term view, with investors focusing their attention on 2021 results.

So, while Paycom seems to have run out of room to grow at the moment, want out-performance? Try guessing the % returns for our Pershing-inspired portfolio – based on billionaire Bill Ackman’s firm Pershing Square – vs. the S&P over the last 1 week, 1 month, 3 months, YTD or even 3 years. Our portfolio combines high growth, quality, and risk mitigation criteria in an interesting way.

 

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