Following a disappointing earnings report, Paycom (PAYC +0.41%) stock is getting crushed in Wednesday's trading. The company's share price was down 38.3% as of 2 p.m. ET, according to data from S&P Global Market Intelligence.
Paycom published its third-quarter results after the market closed Tuesday, and it would be an understatement to say that the market is having a negative reaction to the report. The company's sales performance for the period came in below Wall Street's expectations, and the company also issued guidance for next year that is raising concerns.
NYSE: PAYC
Key Data Points
Q3 shocker: Paycom's business is cannibalizing itself
Paycom posted non-GAAP (adjusted) earnings per share of $1.77 in Q3, which actually beat the average analyst estimate's target for per-share earnings of $1.61 in the period. On the other hand, revenue of $406 million missed the average analyst target by roughly $5 million.
Even though Paycom managed to beat earnings expectations and grow sales by roughly 22% year over year in Q3, overall business performance came in softer than expected. Notably, some business dynamics suggest that there could be sustained headwinds on the horizon.
Paycom's core business revolves around its Beti platform for payroll services. The platform is generally highly regarded, but the efficiency it offers actually seems to be creating some issues for Paycom. Per CFO Craig Boelte, clients have been cutting down spending on some services and other purchases because Beti has made them nonessential. In other words, Paycom's growth is being curbed by cannibalization.
What comes next for Paycom?
For Q4, Paycom is guiding for sales to come in between $400 million and $425 million. Meanwhile, the average analyst target had called for a revenue of roughly $452 million in the period. At the midpoint of its current target, management is guiding for sales growth of roughly 11% over the $371 million in sales it posted in Q4 last year.
Looking ahead to 2024, the company expects the relatively weak sales growth to continue. Paycom is guiding for sales growth between 10% and 12% for the year.
Paycom's business is still expanding, and it's still solidly profitable, but the company will likely need to take some proactive steps if it hopes to return to stronger sales growth. For risk-tolerant investors, today's huge pullback could be a worthwhile buying opportunity. But there's definitely some guesswork involved in charting where the company goes from here.
Editor's Note: An earlier version of this story incorrectly identified the title of Chief Financial Officer Craig Boelte.
