What happened
Shares of human capital management company Paylocity Holding Corporation (PCTY -0.89%) started off 2020 with a bang, rising 17.4% in January, according to data provided by S&P Global Market Intelligence. This was a continuation of the stock's outsized 2019 performance, which saw shares rise 100%.
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So what
It's easy to understand investors' excitement. Quarterly revenue has grown more than 20% year over year in 12 straight quarters. What's more, Paylocity beat its own revenue guidance in each quarter reported during calendar year 2019. Looking at the runway, the company claims to only have 4% of its addressable market, showing there's still plenty of room for further revenue growth. And competitively, it looks well positioned against its peers, as it claims around half of revenue comes from stealing customers from the competition.
Paylocity published a press release on Jan. 15, so it doesn't fully account for January's 17% gain. But maybe it fed investor excitement, since it demonstrated Paylocity's increasing relevance in a changing workforce. For example, the report highlights that Generation Z comprises a greater portion of the workforce (projected 24% in 2020), and craves feedback and recognition. Accordingly, Paylocity added features to its platform that allow for more feedback and recognition.
Investing in features to remain relevant likely boosts investor confidence that the company can continue taking market share from competitors.
Now what
Paylocity just reported second-quarter 2020 earnings, and it was another solid report. The company beat revenue guidance (again), generating $132.4 million. That was up 23% year over year. Further, it raised full-year revenue guidance from the $567 million to $569 million range to $572.5 million to $573.5 million. However, net income fell 3.5% to $5.5 million.
Perhaps lagging profitability is causing investors to question Paylocity's valuation today -- shares are down 9% as of this writing. The company has a high valuation at over 16 times sales. But a high valuation isn't uncommon for high growth stocks like Paylocity. Profitability isn't irrelevant, but what matters is why the company's profit was down.
In this case, Paylocity's biggest cost increases were sales and marketing followed by research and development. In my opinion, using cash to grow its customer base and improve its product offerings is a good move, one that long-term investors should appreciate.
