With its stock down 54% from 52-week highs, one might assume that things look bleak for Paycom (PAYC 1.24%). The cloud-based provider of human capital management (HCM) tools reported its fourth consecutive quarter of decelerating revenue growth, spooking the market with a "mere" 22% sales increase.
However, there could be a fascinating reason for this slowdown that may benefit investors over the long haul. Keeping this in mind, let's explore what makes Paycom so interesting at today's prices.
Smaller but more well-rounded than its peers
Paycom provides HCM software-as-a-service (SaaS) solutions for its clients through its five applications and tools categories:
- Talent acquisition: Applicant and candidate tracking, onboarding, background checks, and e-verification
- Time and labor management: Time and attendance, scheduling, time-off requests, and labor management
- Payroll: Its Beti ("Better employee transaction interface") system lets employees do their payroll)
- Talent management: Employee training, performance, and position management
- Human resources management: Go mobile solutions, documents and checklists, government compliance, COBRA, benefits, and performance forms
Used by over 36,000 clients and over 6 million employees, Paycom now accounts for roughly 5% of the total addressable market for its niche in the HCM industry. Because it operates in a highly competitive area, the company must maintain a durable edge over its peers -- and its Net Promoter Score (NPS) indicates it's doing just that.
On a scale of negative 100 to 100, NPS measures how likely a customer is to recommend its products to a friend, with a positive score generally being viewed as favorable. Boasting a mark of 57, Paycom not only easily meets this threshold but has top ratings compared to its most similar peers, with ADP, Workday, and UKG recording scores of -8, 33, and 17, respectively.
While these high ratings are of little value to investors if not paired with enduring growth and profitability, Paycom also proves to be a leader in those areas.
PAYC Revenue (Quarterly YoY Growth) data by YCharts
Whereas ADP offers profitability similar to Paycom's, it doesn't match its growth track record. Meanwhile, Workday's growth is close to Paycom's but has yet to produce consistent profitability.
Despite this combination of the highest NPS and the most robust total profitability and growth, the company's $9 billion market capitalization is only a fraction of those of its larger peers.
Why Paycom's revenue dip is good (in the long term)
As promising as Paycom's NPS rankings and combined profitability and growth are, the company's guidance for 14% sales growth in Q4 and a mere 10% to 12% increase in 2024 thoroughly disappointed the market. But there's another way to look at the latest results.
In 2021, Paycom launched its Beti solution, which automates and streamlines the payroll process. This reduces errors and omissions by letting employees troubleshoot their earnings before wages are sent out -- which, over the long run, is an excellent thing for Paycom's clients and their happiness.
However, over the shorter term, this will be a headwind for Paycom, as founder and CEO Chad Richison explained: "Perfect payrolls eliminate these common after-the-fact payroll corrections that would otherwise be billable. So the more employees do their own payroll, the greater the savings delivered to the client from Paycom future billings, which results in lower related revenue recognized by Paycom."
Ultimately -- despite the temporary downside -- this is the exact kind of short-term versus long-term trade-off that investors should love to see from companies they are invested in. Yes, it may hurt the company temporarily for a few quarters, but it builds trust with its clients over the long haul and provides them with even more value.
Note that CEO Richison still owns roughly $1.4 billion worth of Paycom stock, showing that his interests in making this trade-off work are aligned with those of his fellow shareholders.
Why the time is right to buy
Once trading for nearly 200 times earnings in 2021, Paycom is now near a once-in-a-decade valuation, as my Foolish peer Trevor Jennewine pointed out, thanks to its price-to-earnings (P/E) ratio of 29.
PAYC PE Ratio data by YCharts
Best of all -- and lost amid the hoopla about its sales growth slowdown in Q3 -- Paycom's earnings per share (EPS) grew by an impressive 44%, highlighting its immense profitability. I'll be watching for the company to boost its newly initiated 0.9% dividend in 2024, as its current payouts use only 13% of Paycom's net income and barely put a dent in its massive $460 million cash balance.
Although the company's high-flying 30% and 40% sales growth days may be behind it, its best-in-class NPS, top-tier financials, and full suite of HCM solutions should keep it an unstoppable force for many years to come. Now trading near an all-time low valuation over worries that its new Beti product works "too well," Paycom looks like a tremendous stock to add to at a discount and hold for the long term.
