Shares of Paycom Software (PAYC -1.14%) have rallied sharply toward a 52-week high following a better-than-expected quarterly update. The human capital management (HCM) software giant has found success in integrating new automation solutions supporting an improved growth outlook.
With the stock still down 60% from its record peak in 2021, can this recent rebound kick-start a sustained turnaround into 2025 and beyond? Let's explore whether Paycom stock could be a good addition to your portfolio right now.
AI-powered growth
Within the HCM industry, Paycom Software stands out through its complete suite of human resources and payroll management tools in an all-in-one platform. The company is benefiting as businesses of all sizes increasingly seek solutions that generate operational and financial efficiencies.
Paycom has invested heavily in artificial intelligence (AI) to build leadership in automation aimed at differentiating itself from the competition and delivering value for clients. Ultimately, multiple systems within its ecosystem that simplify traditionally time-intensive workflows and reduce costs represent a product that should sell itself.
Image source: Getty Images.
In the third quarter, revenue climbed by 11% year over year while adjusted earnings per share (EPS) of $1.67 beat the average Wall Street estimate by $0.06. Adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) reached $171 million, which was up 3% from last year considering continued investment spending in areas like AI and an ongoing international expansion that have held back margins.
Maybe the bigger story was the strong management guidance citing the ongoing momentum. For 2024, Paycom expects total revenue growth of around 10%. The company is also targeting adjusted EBITDA between $745 and $752 million, representing a 4% increase from the result in 2023. Notably, this estimate was hiked from a prior guidance range of $727 million to $737 million.
The trends, including a high level of client retention, point to a solid setup for Paycom into 2025 and beyond. Fundamentals are strengthened by its expanding base of recurring cash flows and a balance sheet position with zero debt.
| Metric | Prior 2024 estimate | New 2024 estimate |
| Revenue (in billions) | $1.860 to $1.875 | $1.866 to $1.873 |
| Change (YOY) | 9.8% to 10.7% | 10.2% to 10.6% |
| Adjusted EBITDA (in millions) | $727 to $737 | $745 to $752 |
| Change (YoY) | 1.1% to 2.5% | 3.6% to 4.5% |
Data Source: Paycom Software, YOY = year over year.
Is Paycom undervalued?
There's a lot to like about Paycom Software in what is recognized as a highly competitive HCM landscape. Historically, the company has specialized in small and medium-sized businesses but has made an effort to capture larger clients. With a current presence in more than 180 countries, management still sees a significant opportunity to grow its market share, particularly with its focus on automation and AI features as a key selling point.
Shares of Paycom are trading at 17 times its consensus 2024 EBITDA level as an enterprise value-to-forward EBITDA ratio. This level marks a discount to peers like Automatic Data Processing, Workday, Paychex, and Paylocity with an average earnings multiple closer to 22. While each company has its differences, Paycom appears undervalued with room for more upside even following the rally in recent months.
If there is a reason for some caution, one question mark is how labor market conditions evolve. In the United States, job gains have slowed in recent months with the possibility of further weakness into 2025, posing a risk to Paycom's growth outlook if clients begin to push back on adding employee headcount, which is an important growth driver for HCM firms.
PAYC EV to EBITDA (Forward) data by YCharts
Decision time on Paycom stock
I believe Paycom Software is a buy now with a good chance that its share price will be higher by this time next year. The ability of management to keep executing its strategy within a resilient macroeconomic backdrop can allow results to outperform expectations as part of the bullish case. The stock can work for investors within a diversified portfolio.
