3 Motives to Offload PAYC and One Alternative Stock Worth Buying

Paycom’s Recent Performance: A Closer Look

Over the past half year, Paycom shareholders have faced a challenging period, with the stock declining by 43.8% to its current price of $128.00. This significant drop was influenced by weaker-than-expected quarterly results, leaving many investors uncertain about the best course of action moving forward.

Is Paycom a potential opportunity at these levels, or does it pose additional risk to your investments?

Why We’re Cautious About Paycom

Although the current valuation may seem attractive, we’re choosing to remain on the sidelines. Here are three reasons to approach PAYC with caution, along with a stock we prefer instead.

1. Billings Growth Signals Tepid Demand

Billings, often referred to as “cash revenue,” reflect the total payments collected from customers within a specific timeframe, differing from recognized revenue, which is spread out over contract periods.

In the fourth quarter, Paycom reported $543.4 million in billings. Over the past year, billings grew by an average of just 8.5% year-over-year—a lackluster result that points to mounting competition and difficulties in attracting and keeping clients.

2. Revenue Growth Forecasts Are Underwhelming

Analyst projections for future revenue offer insight into a company’s outlook. While forecasts are not always precise, faster growth tends to drive higher valuations and stock prices, whereas slowing growth can have the opposite effect.

Wall Street expects Paycom’s revenue to increase by just 6.6% over the next year, a notable slowdown compared to its 19.5% annualized growth over the past five years. This muted outlook suggests that demand for Paycom’s offerings may be softening.

3. Declining Operating Margins

While many software firms adjust their earnings for stock-based compensation (SBC), we focus on GAAP operating margin, as SBC represents a real cost for attracting and retaining talent. Operating margin is a key indicator of profitability, revealing how much profit remains after all core expenses.

Paycom’s operating margin has fallen by 6 percentage points over the last two years. This trend raises concerns about the company’s cost structure, especially since stronger revenue growth should have led to improved efficiency and profitability. For the trailing twelve months, Paycom’s operating margin stood at 27.6%.

Our Verdict

While Paycom is not a poor business, it doesn’t make our list of top picks. Following its recent decline, the stock trades at 3.1 times forward price-to-sales, or $128.00 per share. Although this valuation appears fair, the company’s weakening fundamentals introduce considerable downside risk. We believe there are more attractive opportunities in the market. One alternative to consider is the leading endpoint security platform.

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