TriNet's Valuation Leaves Shares Sensitive To Risk

Following the rise in TriNet Group Inc TNET ='s share price and the company’s strategic shift to “verticalizing” sales, Morgan Stanley’s Danyal Hussain believes the risk/reward is now skewed down.

Sensitive To Risks

Strategy Shift

Hussain downgraded the rating on the company to Equal Weight, while maintaining a price target of $22.

“We still see the PEO (Professional Employer Organization) industry as attractive with long runway for growth, but current valuation makes us increasingly sensitive to risks in TNET's insurance and vertical pricing strategy, and we step to the sidelines,” the analyst explained.

Hussain expects TriNet’s top line growth in the mid-teens to drive EPS growth in the high-teens or higher over the medium term.

However, the analyst believes the recent push to verticalizing sales adds some risk to the growth story, and it seems increasingly likely that the company would be unable to reinsure its insurance book to limit margin and revenue downside.

Related Link: TriNet Reports Q2 Adj. EPS $0.27 vs $0.25 Est., Net Service Sales $149.2M vs $148M Est.

“Strategy shift favoring pricing over Worksite Employee growth skews risk/reward down: TNET's focus on verticalizing its products for a premium price and easing on Worksite Employee (WSE) growth is a strategy shift away from brute force sales-driven strategy it successfully employed before,” according to the Morgan Stanley report.

However, Hussain pointed out that this strategy shift raises execution risk, without any apparent, significant upside, moving the risk/reward to a less favorable position.

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