The Invesco QQQ Trust tracks the Nasdaq-100, the largest stocks in the technology-heavy Nasdaq Composite index. After a rough 2022, it's up more than 30% so far this year. It has caught a lot of investors by surprise and left some feeling like they are missing out. But not all tech stocks are in the Nasdaq. And some of the ones that aren't are trading at surprisingly cheap valuations compared to their history.
Paycom Software (PAYC 1.66%) and Veeva Systems (VEEV 1.27%) are great examples. They both generate a ton of cash and plenty of earnings, and are growing at respectable rates. They also have loyal customers and valuations that are hovering near all-time lows. Here's why I think shares are a bargain right now.
1. Paycom Software
Paycom operates in the crowded field of human capital management (HCM). In the simplest terms, its products help companies recruit, manage, and pay employees. In doing so, it facilitates dozens of processes related to tracking time, administering benefits, and complying with regulations. It competes with industry stalwarts like Automatic Data Processing and smaller challengers like Paylocity.
Despite intense competition, it is an unvarnished success story. The stock is up 1,650% since going public in 2014. And clients and revenue compounded 9% and 25%, respectively, from 2019 through 2022. But investing is about looking forward. And Wall Street's concerns about a recession have pushed the stock down to a multiple of free cash flow not seen since before the pandemic.
PAYC Price to Free Cash Flow data by YCharts
Although most of their revenue is locked in through subscriptions, HCM providers can still be hurt by recessions. Customers typically pay based on how many employees are using the system and how often. When recessions hit, that number of employees goes down. But Paycom has proven resilient. At the depths of the pandemic revenue growth only sank to 7%. Besides, even if employee counts fluctuate, it isn't likely to lose many clients.
Paycom already retains 93% of customer revenue from year to year. And its Beti offering is proving even harder to leave. Beti -- which stands for better employee transaction interface -- was launched in 2021. It streamlines the payroll process, putting it in the hands of employees. That's similar to vacations, timecards, and benefits changes. With Beti, many of the cumbersome, error-laden HR processes are simplified or outright skipped. Clients using Beti are staying at a 99% rate. It's just the latest move that proves Paycom is the most innovative company in the HCM industry. From the beginning, management has been focused on simplifying complex HR processes. It keeps delivering. I believe it will keep delivering for shareholders, too.
2. Veeva Systems
Veeva calls itself the industry cloud for life sciences. The name fits. The company offers a variety of software solutions for customers trying to solve two very different problems. The first is for companies trying to sell their products within the life sciences industry. The second is for companies creating those products. Of course, some clients do both. Its platform integrates applications to help clients navigate everything from managing clinical trials and optimizing business processes to managing customer relationships and planning events. That all-encompassing service has lured an impressive roster of customers including Horizon Therapeutics, Bristol Myers Squibb, Novartis, and Moderna.
It's an underrated business with impressive financials. CEO Peter Gassner is quick to point out that the company has always focused on profitable growth. It's not just talk. It has grown free cash flow per share 12-fold since 2016 and has never had a year without positive free cash flow. Although management doesn't guide for free cash flow, it is projecting non-GAAP (adjusted) operating income to fall a bit this year. The lukewarm forecast has Wall Street on edge. Before this past year, annual revenue growth had never dipped below 25%. Even last year's 16% is nothing to scoff at. But management is only guiding for 9% in the current year, its fiscal 2024. Using the price-to-free-cash-flow ratio as an indicator, the uncertainty has given investors what appears to be an unusual opportunity.
VEEV Price to Free Cash Flow data by YCharts
Perhaps anticipating a negative reaction, management also issued projections for fiscal 2025. Those imply an acceleration back to 19% revenue growth and a 25% jump in non-GAAP operating income. That type of back-loaded forecast should typically be met with skepticism. But Gassner and company have earned the benefit of the doubt over Veeva's decade as a public company. Given the low valuation compared to its history, I'm willing to take the chance.
