The biggest benefit of investing through a Roth IRA is that any gains can be withdrawn tax-free down the road as long as you follow the rules. That makes this investment vehicle a great place to put stocks that hold lots of long-term upside potential.
With that in mind, here's why I think Paycom Software (PAYC -0.10%) is an ideal stock to consider buying in your Roth IRA.
Image source: Getty Images.
The business
Paycom's CEO and founder Chad Richison worked in the payroll industry for several frustrating years. Richison felt that the big players in payroll solutions offered products that were complicated to use and didn't provide employers with the tools they needed to effectively manage their business. In 1998, he set out on his own to create a better solution.
Richison ended up launching the first cloud-based payroll processing software program in the country. What's more, he built his platform from the ground up with the goal of helping employers manage their employee's entire lifecycle. Today, Paycom's software can help HR teams with a range of critical functions like recruiting, time management, scheduling, training, benefits management, and more.
Paycom's intuitive design and ever-expanding list of functions have proven to be a huge hit with businesses. The company has been rapidly adding new clients from coast to coast for years while maintaining a stellar retention rate of 91%. These numbers prove that the company can compete and win against industry giants like and Paychex and Automatic Data Processing.
Flourishing financial statements
One big benefit of offering software-as-a-service is that Paycom gets to bill for its services continually, providing the business with an ever-increasing source of recurring revenue. In fact, in the fourth quarter of 2016, 98% of Paycom's top line was derived from repeat business.
With a dependable stream of revenue hitting its bank account each quarter, Paycom's management team can easily plan out its expenses to ensure that the bottom line also grows at a robust rate. That's exactly what investors have seen happen since the company's 2014 IPO.
PAYC Revenue (TTM) data by YCharts.
Meanwhile, the business is now throwing off enough cash that management can simultaneously invest in future growth and return cash to shareholders. We recently saw the company authorize and exhaust a $50 million stock repurchase program. That's not something you often see from fast-growing business.
The opportunity
With a competitive platform on the market and a rock-solid business model in place, Paycom has turned its full attention to expansion. Thankfully, even today, it appears that the company still has plenty of room left for future growth. As of the end of 2016, Paycom only had sales offices in 32 of the 50 largest metropolitan areas in the U.S. As the map below indicates, there is still a lot of white space left to fill.
Paycom Software sales office locations as of April 2017. Image source: Paycom Software.
To take advantage of this wide-open market opportunity, management has announced plans to open 10 to 14 new sales offices through the country over the next few years. In addition, the company is already investigating the potential to expand overseas.
Between gaining share in its existing markets and opening new sales offices, Paycom looks well positioned to post double-digit revenue and profit gains for years to come.
I'm not the only bull
Given all of the above, you might not be surprised to learn that Paycom has turned into a market darling. Shareholders who got in during the 2014 IPO have already enjoyed a gain of 250%, which is a market-crushing return. However, the company is currently trading at 78 times trailing earnings and 43 times forward earnings, both of which represent a huge premium to the market in general.
Despite the premium price tag, I am personally of the belief that there is so much to like about Paycom's competitive position, financial statements, and market opportunity that they more than justify an investment today. If you agree, then buying Paycom through your Roth IRA could prove to be a financially savvy move.
