Paycom Software (PAYC 0.53%) has been a cloud software investor favorite for good reason. Since its IPO in 2014, shares of the human resource management firm are up over 2,500%, trouncing the share price returns of its peers by a wide margin. COVID-19 has accelerated changes in the ways organizations manage their workforces, and Paycom looks poised to continue benefiting from the migration to digital tools that help simplify and automate redundant tasks. It isn't likely to remain the same high-growth story it was the last few years, but there's still lots to like about this cloud stock today.
A best-of-breed among a crowded field
Human resource management software falls under the large but still fast and steadily growing cloud software universe. Even within this subset of the industry, HR management, payroll, and related human capital services technology is a crowded field. According to research tool Noonum, Paycom competes against other small firms like Paylocity, larger HR software companies like Workday and Paychex, and elements of diversified software giants ADP, SAP, and Oracle.
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Paycom has been the cream of the crop, though, going from a small niche player to top HR tech platform with its single database for all HR functions, spanning payroll to headhunting. The company isn't the small underdog it was back in 2014 with a current market cap value of nearly $25 billion, but there's still potential here. Global HR spending totals in the hundreds of billions of dollars, and of that total, software makes up a small piece of the pie. But Grand View Research expects annual spending on HR software to grow an average of 12% a year through 2027, reaching some $36 billion per year.
With trailing 12-month revenue of just $814 million and yet to make a move beyond the U.S., there's certainly room for Paycom to continue expanding in the years to come.
Is it really a buy?
As with other fast-growing and profitable technologists, Paycom stock carries a premium price tag. Shares trade for 30 times trailing 12-month sales and nearly 200 times trailing 12-month free cash flow (revenue minus cash operating expenses and capital expenditures). Suffice it to say expectations are priced in for Paycom to continue steadily expanding both the top and bottom lines for the foreseeable future.
There's a good chance Paycom delivers. Revenue grew 14% during the first nine months of 2020, which includes the COVID-19-induced lockdowns that led to mass layoffs and furloughs in the U.S. It's a testament to the demand for a simple tool to manage all of an organization's HR needs in a new digital world. There are, however, ongoing risks from the pandemic. Workforces are going remote, giving rise to other human capital management tools like gig economy outfit Fiverr. Paycom nevertheless remains on solid footing and has added to its customer base in the last year. It also had $156 million in cash and equivalents and debt of only $31 million as of the end of Sept. 2020.
Is the premium worth it, though? Personally, I'm not buying right at this moment. While Paycom has been an HR software leader, I think there are other names in the cloud software space carrying similar premiums but growing at faster rates and flush with even more cash. After rising 71% in 2020, there's quite a bit of future growth baked into Paycom's share price at this juncture.
However, for those that already own Paycom, I see little need for shareholders to head for the exits. This is still a rock-solid business that's benefiting from its easy-to-use platform and a general migration among businesses large and small to digital tools.
