What happened
Paylocity (PCTY +1.38%) returned 29.8% in August, according to data provided by S&P Global Market Intelligence, by smashing analyst earnings estimates, then riding the momentum in smaller stocks and growth stocks in the back half of the month. The company reported adjusted earnings per share of $0.46, which was well above the $0.28 forecast by analysts. Paylocity also exceeded expectations for sales, though by a much more modest amount.
So what
Paylocity is in a great spot right now, and it is taking advantage of it. The company's products and services include payroll, scheduling, time tracking, and benefits management, with a focus on small businesses. These services are in demand, and Paylocity seems to be taking market share away from its competitors.
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The latest earnings report indicates excellent traction among businesses with fewer than 50 employees. Strong results are being produced across a number of different product categories, too. That sort of broad success is a bullish sign for investors, because it's less likely that any single product line can disrupt its growth.
There are several clear growth catalysts for the coming years, including increased product utilization among customers, a successful sales strategy, and the ongoing economic recovery leading to higher employment. Paylocity has averaged nearly 20% revenue growth in recent years, and it expects that to accelerate to 25% for the fiscal year that will end in July 2022.
Now what
Paylocity is a fundamentally strong company with exciting growth opportunities in the foreseeable future. It's certainly worth a look if you're looking for a new growth stock for your portfolio, especially if you want to diversify away from more typical tech stocks.
However, prospective investors should be aware of certain risks here. Paylocity's net profits have been temporarily inflated by tax benefits. Its net margin won't stay this high forever. The stock also has an aggressive valuation that already assumes high growth rates and strong execution. Paylocity's forward price-to-earnings ratio is over 115, and its price-to-book is 31, both of which are high.
Most growth investors won't bat an eye at these valuation ratios, but it certainly adds risk to the story. If Paylocity stumbles and falls short of its excellent growth forecasts, share prices are likely to tumble. It's also more susceptible to volatility if there's a market correction, regardless of the company's financial performance.
