Will The Pullback In Paycom Payoff For Investors?

Key Points

• Paycom had a great Q4 and issued hot guidance that has the market down. 
• The move in prices is an opportunity that the analysts support. 
• Price action may be range bound in the near to short term, but the long-term outlook is bullish. 

The price action in Paycom NASDAQ: PAYC stock is down more than 8% following the Q4 earnings release but this is an opportunity for long-term investors. As hard as it is to see a stock fall, especially on such good news, these are the times that long-term investors can use to dollar-cost-average into a bigger position.

And the results were good; the company produced growth, outperformed expectations, widened margins and guided higher which is why the pullback in prices is so out of place. 

The only thing wrong with the stock is the valuation, it trades at close to 55X earnings, and growth is slowing. The takeaway for investors is that cash flow is strong, the balance sheet is strong, and the cash pile is growing. Sooner or later, assuming the stock can maintain a range, earnings will catch up with the valuation, and another rally may form. 

Paycom Has a Robust Quarter, Analyst Hike Targets 

Paycom’s deep selloff is more questionable, given the analyst's reaction to the Q4 results and guidance. The company reported $370.6 million in net revenue for a gain of 30% that, beat the consensus by 100 basis points. The revenue was driven by a 30% increase in recurring revenue which may be the problem with share prices.

If recurring revenue also grew by 30% and is 98% of total revenue, there is not much new growth in the mix. In this light, the YOY comps may be strong for another quarter or two, but they will get weaker and weaker as the year progresses. This is offset, however, by a 580 basis point improvement in the margin that left the adjusted EBITDA up 49% versus last year. This is best seen in the adjusted EPS, which is up 55% YOY to $1.73 and $0.24 better than the Marketbeat.com consensus estimate. 

The guidance is also good, which leads to why the analysts are upping their targets and why the fall in stock prices is so hard to comprehend. The company issued guidance for Q1 and FY23 above the consensus mark at the top and bottom lines. The analyst reaction is, so far, is 5 increased price targets that amount to a Buy rating and a price target in-line with the current consensus.

The consensus is increasing due to this activity and suggests that at least 23% of the upside is available. In this light, the pullback in prices is questionable and perhaps more of an opportunity than it first appears. An uptrend in analysts' sentiment could get the price target above $400 and the stock up to a new long-term high. 

“We delivered outstanding results in 2022, with accelerating revenue growth and strong margins, reflecting strong demand for our user-friendly solutions and attractive client return on investment,” said Paycom’s founder, chairman and CEO, Chad Richison. In 2023, we will continue to invest in innovation around the employee experience and automation to deliver more value to our clients.”

Institutional Support Is High And Rising 

The institutional activity has been a little mixed over the last year, but 3 of 4 quarters saw more buying and selling, which has ownership on the rise. The institutions own about 88% of the stock and may continue picking it when shares are down. The price action suggests a move down to the $288 level is possible. Support should become evident at that level if not higher. In this scenario, the stock may move sideways within its range until there is something more exciting to attract investors.