This Fintech Stock Is Overshadowed by Competitors

The fintech industry has become increasingly crowded and notably hard in which to compete and cut through the noise. In this clip from "The Rank" on Motley Fool Live, recorded on Feb. 7, Motley Fool contributors Matt Frankel and Jason Hall discuss Ceridian's (CDAY 0.56%) financials and analyze whether it's worth investing in given the fiercely competitive fintech industry.

Matt Frankel: No. 8 is a stock called Ceridian. They are a fintech company, ticker symbol is C-D-A-Y. They produce payroll software for larger enterprises. They don't make public their customer list, but they have over 5,000 of them. A lot of big enterprises don't want their names just thrown around. They offer next-generation payroll software that solves a few problems that are typical of payroll systems. For example, there's always a big problem and I can tell you this from being in management before working for The Fool, that there's a big cut off when it comes to when your pay period ends and what data you can access before and after that, is a better way to describe it. The system generally locks the data in until the pay period is over. It limits your ability to fix errors, audit data, make sure you're paying people right, make sure there's no glitches in payroll, until the cycle is complete. Ceridian provides a more seamless approach to it so employers can access all of the data they can audit at-will. They can control the process a lot more. It's caught on really well. In the third quarter, their margins improved, their revenue grew, 33% growth in recurring revenue. The recurring revenue, the gross margin is almost 73%, which is a pretty strong margin. Just to give you an idea of the size of enterprises they deal with, their average recurring revenue per customer is over $107,000. This is not [Intuit Inc. (INTU 3.46%)] QuickBooks. This is actually big enterprise scale payroll systems. They are profitable. They have a little over 15% adjusted EBITDA margin. Their numbers are trending in the right direction. But if we're looking at software-as-a-service businesses, 33% recurring revenue growth, there are better opportunities than that for the money in my book. The customer count grew 11% year-over-year. A lot of my favorite software-as-a-service companies are growing a little bit faster. That's why I ranked it toward the bottom of the pack. Guys, any thoughts on Ceridian before we move on?

Jason Hall: Yeah. Just real quickly. I'm really interested in the company and learning more about it. But the things that put it on the lower end of the ledger for me is, its growth rate is decent growing in the mid 20s. That's respectable. It's profitable on a cash flow basis. I think that's really important. Because it doesn't have a lot of companies that we see that are in these cloudy recurring revenue businesses, asset-light models. They have tons of cash and maybe a little bit of debt or no debt. Doesn't really have a lot of cash, but that cash position grew. It doubled over the past year and their debt profile hasn't changed. That's really interesting. But then I start thinking about how competitive the space is that it's in, and then this aspect right here, and thinking about pricing power and cost advantage. This is not a super high-margin business like we think about with some of these companies in not similar areas, but similar like the services, cloud-based businesses that we like. And that just tells me that, its ability to take that operating margin, the operating leverage is at gross revenue and its cost profile doesn't necessarily change that much, is not going to be as beneficial on the bottom line. It still trades for 12x sales. This is not a super cheap company as much as the prices come down. Just being mindful of that, that's why I rated it a little bit lower. If I knew more about the company, I might have a little bit higher conviction to that. Taylor?

Taylor Carmichael: Yeah. My take on it was similar with yours, Jason. There's a lot of competition in this. Matt, are they a direct competitor with Paycom (PAYC 0.74%)? That's another one we're going to talk about today.

Frankel: Paycom focuses more on the small-to-mid business and provides an all-in-one suite of services, not just payroll. It's more of a large enterprise solution than Paycom is.

Carmichael: Good. That was my take on it though. I just feel like there's a lot of these in the payroll space. One's Paylocity (PCTY -0.42%)have I got that right?

Frankel: It's getting to be a crowded space. ADP (ADP 0.21%), I think is the big one.

Hall: Paychex (PAYX 0.32%) is there.

Frankel: It's a space that's getting crowded. There's a lot of evidence as to Radian (RDN 2.27%) and Paycom do it better than the other ones. I mentioned they solve a lot of problems that typical payroll systems have. The last management job I worked at used ADP, and there were a lot of shortcomings. When it came to an employee that says, can you check my hours for this pay period? I had to wait until the pay period was over. It does solve a lot of problems that a lot of the other operators have, but it is getting to be a crowded space and that is a concern.