Paycom Surges But These Analysts Remain Sidelined

Cloud-based management software company Paycom Software Inc PAYC reported fourth-quarter results that came in better than expected and helped boost the stock to a new 52-week high.

The Analysts

Guggenheim Partners' Nandan Amladi maintains a Neutral rating on Paycom Software with a price target lifted from $130 to $160.

Canaccord Genuity's David Hynes Jr. maintains at Hold, price target lifted from $140 to $160.

Guggenheim: The Encouraging And Worrisome

Paycom's earnings signaled continued momentum highlighted by more than 30 percent revenue growth and strong profit in the human capital management (HCM) sector, Amladi said in a research report. The quarter also showed an improvement in unit retention from 91 percent to 92 percent aided by a mobile app adoption.

On the other hand, Amladi said investors should look out for higher costs as the company's move up-market plan is showing some signs of success but needs higher R&D spend and a longer sales cycle. This could also result in delays in revenue recognition and the first-quarter report will serve as a "good guidepost for the year."

Canaccord: Valuation Concerns

The cloud-based HCM space is essentially a zero sum space, which Hynes said begs the question: how are so many companies like Paycom showing up such impressive growth numbers?. For example, Paycom's recurring revenue growth accelerated to 32 percent in the fourth quarter, which marks the highest its been in six quarters and management's 2019 guidance calls for 26 percent revenue growth.

Assuming a total addressable market of $15 billion and 10 percent of the market turns over each year, Hynes said there is enough for multiple companies including Paycom to generate several more years of healthy growth. At the same time, Paycom's stock looks expensive at more than 10 times EV/R and 45 times EV/FCF on 2020 estimates. As such, investors should be patient and wait for a pullback in the stock.

Price Action

Shares of Paycom closed higher by 7.7 percent at $169.14. Earlier in the day, the stock hit a new 52-week high of $179.22.

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