KeyBanc Takes Bullish Stance On Paylocity, Sees Attractive Opportunity In HR Software

HR software represents a large and attractive opportunity, and Paylocity Holding Corp PCTY is a niche HR SaaS provider in the underserved small-to-medium-size business market, according to KeyBanc Capital Markets.

The Analyst

Arvind Ramnani initiated coverage of Paylocity Holding with an Overweight and $104 price target.

The Thesis

Ramnani quoted IDC projections for the HR software market, which is expected to grow at a healthy CAGR of 9.5 percent to $30 billion by 2022. (See the analyst's track record here.) 

Growth is being driven by secular demand for cloud-based solutions from enterprises looking to replace manual, time-consuming tasks, increase productivity and strengthen the employee-employer relationship, he said in the Tuesday initiation note. 

Every business — small and large — requires an HR software solution, Ramnani said. 

Paylocity offers a niche HR SaaS solution to the SMB market, the analyst said. This market requires a different solution than large enterprises, since SMBs are typically resource-constrained, he said. 

While the larger enterprise market for HR SaaS is competitive, the SMB market is largely underserved, Ramnani said. Paylocity’s product offers SMBs considerable functionality and ease-of-use, with cost-effective pricing, he said. 

The analyst further added that Paylocity has been able to generate annual revenue growth of more than 25 percent over the past five years. What’s more impressive, Ramnani said, is that this was achieved with an expansion in the adjusted EBITDA margin from 5.4 percent in 2015 to 21.5 percent in 2018.

“Looking ahead, we expect margin to continue expanding as the business benefits from economies of scale, expansion at existing customers and further G&A leverage." 

Price Action

Paylocity shares were trading up 1.55 percent at $91.67 at the time of publication Wednesday. 

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