Paycom Software (PAYC 0.74%) is a pioneer of web-based human resources (HR) and payroll software and one of Newsweek's most trusted companies in America. It's a winner of Business Intelligence Group's 2023 BIG Innovation Awards. But it's a big loser this year for investors.
Actually, the stock has been a loser for an even longer period. Paycom's shares fell 8% in 2021 and 25% in 2022. The stock is still down, plunging more than 40% so far in 2023. But could Paycom nonetheless be a millionaire-maker stock?
NYSE: PAYC
Key Data Points
What it would take
There's an old joke that the easiest way to make $1 million is to start with $2 million. Any stock, including Paycom, could be a millionaire-maker if you begin with a large enough upfront investment.
However, let's assume, instead, that you initially invested $10,000 in Paycom stock. To turn that into a cool $1 million, your investment would need to deliver a 100x gain. The odds of generating that kind of return are slim to none over a short period.
But what if you had a time horizon of 25 years? Crunching the numbers reveals that Paycom would have to deliver a compound annual growth rate of a little under 20.3%. Very few companies can achieve this goal -- but it's not impossible.
For example, Nvidia turned an initial investment of $10,000 into nearly $5.7 million over the last 25 years. The same investment in Tesla at its IPO in 2010 would be worth close to $1.5 million today.
Can Paycom be a millionaire-maker?
Paycom isn't an Nvidia or Tesla. The software company is celebrating its 25th birthday this year. An initial investment of $10,000 in 1998 would have grown to roughly $113,000 today.
The company could have a hard time delivering a higher return going forward. Paycom's revenue is on track to grow in the ballpark of 22% year over year in 2023. However, the revenue growth rate is expected to fall to between 10% and 12% next year.
At first blush, such a deterioration in revenue growth would seem to doom Paycom's chances of being a millionaire-maker. It's important to understand why the company's revenue growth is slowing, though.
Paycom's Beti do-it-yourself payroll software for employees is eliminating errors, corrections, and unscheduled payroll runs, and the company bills for such tasks. Beti is so good that it's hurting Paycom's revenue. Over the long run, however, the software could be so attractive to employers using competitors' products that it accelerates Paycom's revenue growth.
Still, I don't think that Paycom will be a millionaire-maker stock under the parameters we've established. Allied Market Research projects that the global HR and payroll software market will be nearly $56 billion by 2031. Even if Paycom captured 100% of this market (which is highly unrealistic), it would need a sky-high price-to-sales multiple of over 19x to turn $10,000 into $1 million.
The more important question
Whether or not Paycom will be a millionaire-maker isn't the most important question for investors to pose. Instead, they should ask, "Will Paycom stock make me money over the long term?" I think the answer to this question is a resounding "yes."
Paycom's valuation is the most attractive it's been in quite a while. Its price-to-earnings-to-growth (PEG) ratio is 1.17 -- not bad at all. I suspect that Beti will ultimately drive the company's sales much higher. And I predict that this beaten-down stock won't be a loser for too much longer.
