Paycom's (PAYC 1.24%) stock soared to a record high of $550.61 during the peak of the growth stock rally on Nov. 2, 2021. That marked a 3,571% gain from its debut price of $14 per share on April 15, 2014 -- but it now trades at about $200.
Therefore, a $1,000 investment in the online payroll services provider's IPO would have briefly grown to over $39,000 before shrinking back to about $14,000. That's still an astounding 10-year gain, but is Paycom's stock still worth buying today?
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Why did the bulls love Paycom?
From 2014 to 2019, Paycom's annual revenue grew at a compound annual growth rate (CAGR) of 37% while its adjusted earnings before taxes, depreciation, and amortization (EBITDA) rose at a CAGR of 64%. That rapid growth was driven by the increased adoption of online payroll services and its rollout of additional human capital management (HCM) services for managing employees, expenses, and digital documents.
Paycom's growth slowed down during the pandemic, but its revenue still rose 14% in 2020 as the pandemic drove more companies to accelerate their digital transformation strategies. Its revenue then increased 25% in 2021 and 30% in 2022 as the pandemic passed. Its adjusted EBITDA margin expanded from 39% in 2020 to 42% in 2022.
That resilience drove the bulls to Paycom during the buying frenzy in growth stocks in 2020 and 2021. At its peak, its enterprise value hit $31.9 billion -- or 23 times the revenue and 55 times the adjusted EBITDA it would generate in 2022.
Why did the bears take aim at Paycom?
But to sustain those high valuations, Paycom needed to maintain its accelerating growth. Unfortunately, inflation, high interest rates, and other macroeconomic challenges throttled its growth again over the past year. It expects its revenue to rise just 22% in 2023 as companies rein in their spending to cope with the macro headwinds, and to grow a mere 10%-12% in 2024 as it implements some "strategic revenue decisions".
Those "strategic" decisions mainly revolve around its new Beti platform, which automates its payroll services to provide a higher return on investment (ROI) for its clients. Beti's growth might increase the stickiness of Paycom's ecosystem, but it also reduces its revenue per customer by eliminating certain billable items and cannibalizes its legacy services.
That abrupt shift convinced the bears that Paycom's high-growth days were over, and the stock shed its premium valuations. Its decision to accept lower billings per customer also suggested it was losing its pricing power against bigger cloud-based HCM companies like Workday (NASDAQ: WDAY) and Oracle (NYSE: ORCL).
Is Paycom's stock getting too cheap to ignore?
Paycom's stock overheated in 2021, but it now trades at just six times next year's sales and 15 times its adjusted EBITDA. Workday, which is larger and growing faster, trades at nine times next year's sales and 28 times its adjusted EBITDA.
However, Paycom's valuations cooled off because it hasn't reversed its cannibalization issues or stabilized its revenue growth per customer yet. On the bright side, its insiders seem to be optimistic about a long-term recovery -- even as its stock tumbled 30% over the past 12 months, they bought more than seven times as many shares as they sold.
Over the long run, Paycom's growth could accelerate again as it uses Beti as a new foundation to cross-sell additional services. It could also widen its moat and ensure it remains a leader in the expanding HCM market. That said, I believe Paycom's stock will stay out of favor in this tough market until more green shoots appear. Investors can accumulate some shares of Paycom today as the bulls look the other way -- but it won't rally until it provides a clearer long-term outlook.
