In this clip from "3-Minute Stock Updates" on Motley Fool Live, recorded on July 29, Motley Fool contributor Toby Bordelon takes a look at human resources technology company Paycom Software (PAYC 1.72%) compared to competitors Automatic Data Processing and Paychex. Paycom may trade at a higher valuation compared to the others, but does its faster growth rate make up for its volatility?
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Toby Bordelon: Here's a little bit of a relative valuation chart I put together. You may recognize this if you follow our deep dives this is a quick valuation format we use there. Which you can take a look at here, when you look at this, you see Paycom much higher price-to-sales ratio, much higher forward P/E earning, that's the forward-12-month P/E earnings I pulled there from Yahoo!.
On the other hand, though, they have a much higher growth rate for their revenue and higher gross margins. You're looking at this, yeah, richly valued but look at that growth. Do they deserve a premium valuation? Maybe they do. If you're growing your revenue 30% compared to your competitors, who are growing at about 10% each, maybe you deserve a little bit of a premium valuation there. Maybe it's overvalued there but I'm not sure that it's not deserved.
Here's just look at the five-year chart, you can see Paycom is, by far, more volatile than these other two. They had a nice huge run-up, they've come down quite a bit, their valuation is not as rich as it used to be just even a year ago but much more volatile. I think what you're looking at here is a higher-growth company, one that's going to be more volatile, it's going to be a little rougher of a ride. But it's shown they can grow faster than competitors as they've shown over the recent past and that's worth something. Is it worth the current price? Different opinions on that, but fast growth certainly is worth something. I'll also point out that the board just upped the stock repurchase plan, they authorized a $550 million of stock repurchases. If the short report or the earnings they're releasing next week, bangs the stock, maybe we're going to see some purchases from the board on that, which wouldn't be a terrible thing.
