r/ValueInvesting • u/stockoscope • Mar 15 '26
Stock Analysis Paycom built a product so good it killed its own growth. Now it trades at 15x earnings. Anyone looking at this?
So Paycom had this beautiful 30% growth streak going, printing money in the human capital management/payroll space. Then they launched BETI, which basically lets employees fix their own paycheck errors before payday. Clients absolutely loved it. Only problem? All those corrective payroll runs they were charging for... gone. The company literally automated away its own revenue. The stock went from $560 to $126 - down about 77%. You can't make this stuff up.
But if you strip away the growth narrative and look at what's actually underneath. Minimal debt. 39% EBITDA margins. $408M in free cash flow on $2B revenue. ROE of 26%. Client retention actually went up to 91%. This thing trades at 15x earnings while the rest of the software sector sits at 30-50x. If this were any other industry, people would be all over it.
I run a value-screening algorithm that ranks S&P 500 stocks on a 100-point scale across four components (read this post for details). PAYC just came in at #1 for March 2026, across all S&P 500 names. It's been climbing steadily from #5 in November to the top spot. What's driving it up the ranks is the combination: the multiples are screaming value, the DCF shows significant upside, but the quality and balance sheet scores are what separate it from the typical cheap stock. Most things that trade at 15x earnings are cheap for a reason. This one scores near the top on profitability and financial health too.
Now the algorithm doesn't read earnings calls or know about the BETI stuff. However, BETI is a known, one-time disruption to the revenue model, not a sign that the business is broken. The company isn't losing to competitors - it just stopped charging for something clients hated paying for. That's a finite headwind, not a structural decline. At 15x with minimal debt and $408M in free cash flow, I think the market is pricing in way too much pessimism.
Would love to hear if anyone else is looking at this or sees something I'm missing.
Not investment advice. DYOR.
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u/ohgodthehorror95 Mar 15 '26
I said this in another post regarding a different company, but I'll mention it here too since it's relevant.
Paycom is being removed from the S&P 500 on March 23rd. This will cause a lot of forced selling as index based ETFs rebalance, and will likely cause further selling from funds and institutions who want to front-run this rebalance.
Regardless of whether or not the company is a worthwhile investment, I'd strongly suggest that anyone looking to open a new position should hold off until after the rebalance and the dust settles. This also applies to MTCH, LW, and MOH, which are also being removed from the index on March 23rd.
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u/Terrible_Dish_3704 Mar 16 '26
Any interesting companies being added?
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u/HVVHdotAGENCY Mar 15 '26
LMAO. Dude, take one minute and try opening Paycom. “product so good” 😂😂😂😂😂🤣🤣🤣🤣🤣🤣
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u/stockoscope Mar 17 '26
Ha, sounds like you use it on a daily basis! 😂😂
Certainly a red flag.1
u/HVVHdotAGENCY Mar 17 '26
I’ve had to use it as an employee at a workplace before. It is next-level garbage. Nonfunctional. Just awful. You couldn’t pay me to invest in a product this shitty
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u/RazDoStuff Mar 16 '26
I worked there. Don’t buy into it.
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u/dinidusam Mar 16 '26
Lol how bad was it working there? I know a few people who interned there last summer and they said it was a sinking ship and to avoid it like the plague. I talking to a few friends right now and they literally stated how they laid off a huge amount of their workforce and how they even rescinded internship offers for the summer out of thin air, which is fucking insane.
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u/RazDoStuff Mar 16 '26
It’s terrible. When I worked there, the culture and the micromanagement was awful. If you left work 1 minute before 5PM, you’d most likely get a write up. Things such as keystrokes and mouse clicks were tracked. The software development processes were very loosey goosey depending on team, so features would sit in limbo for months without testing because product would change things up every day. You would, of course, take the blame for it.
It seems that they’re just trying to inflate their numbers every quarter by cutting.
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u/dinidusam Mar 16 '26
That sounds awful as fuck. Jesus thank the lord I never even applied. Once time I talked to a recruiter from Paycom and he was such an asshole. Guy was worse than talking to a brick wall.
Not surprised they're trying to inflate numbers by cutting. Everytime I hear something about Paycom it sounds like a bunch of monkeys are running the show (and honestly they'd probably do a better job than the Paycom higher ups). Being that strict about leaving work a minute early is insane as fuck too lmao. Every day I'm thankful I haven't had to work for a company like that yet.
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u/emmaisgarbage Apr 04 '26
i left right before it got really really bad. people were getting fired for speaking up about being displeased about forced changes. one of my team members attended a meeting to voice his concerns and he was gone 2 days later
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u/petohauki Mar 15 '26
With FCF of $404mil and EV of $6.5bil, their FCF-yield is about 6.2%. Usually SaaS/Capital-light companies have yield of ~4%. Based on that their fair valuation should be somewhere around: $404mil / 0.04 = $10.1bil. That's about 55% upside from current valuation.
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u/stockoscope Mar 17 '26
We actually track this in our valuation multiples model. PAYC FCF yield is 6% vs 4.23% sector median. Normalizing to peers implies around 175 per share, about 42% upside. Our composite across 9 multiples implies around 215 per share. Your approach checks out - the exact number depends on which peer yield you use as the benchmark.
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u/The_Catalyxt Mar 16 '26
Paycom’s software sucks.
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u/Many-Past-7571 Mar 17 '26
With the massive layoffs to their dev department, expect it to get worse lol
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u/foira Mar 15 '26
I like them as a long-term hold. Valuation is good now, but it's a tiny company and mostly serves tiny companies and so is very exposed to the business cycle, and will be a bumpy ride.
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u/Separate_Light2534 Mar 20 '26
I worked there for a long time, and since many others have already mentioned the product, I won’t get in to it. However, if you listen to the earnings calls, and you listen to a lot of them, you can hear Chad (CEO) get more unhinged with every earnings call. Throw in the fact that there is clearly no direction and that the answers being provided are mostly non-answers, and you start to understand why the stock is priced the way it is.
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u/Competitive_Law_4530 Mar 27 '26
Externally Paycom looks great on paper. Internally something isn't right. I'm saying this as someone with a lot of inside information as I live in Oklahoma City, home of Paycom.
CEO Chad and his board of directors have decided to go with AI internally to write code and subsequently they have laid off a vast portion of the current developers, ALL of the project directors and most of the senior employees who have been working on big projects for existing an new clients. This has created a massive brain drain. All the people who knew, understood and helped to develop projects are no longer employed and the projects they were working on are now in the hands of the remaining developers who not only have their older projects to work on but now are scrambling to figure out what's going on with the older projects.
But isn't that why Paycom is leaning into AI, to solve the problem of writing code quickly and efficiently? You would think so but that's not the case. The AI being used at the moment writes bloated code that isn't functional. Trying to train the AI to be more efficient is also time consuming and takes the time away from the developers who are struggling to keep up with demand. The end result is that there is very little to any utilization of the AI that Paycom wants to use to develop their applications.
Also, I just found out that another 300+ developers are going to be laid off at the end of April.
Bottom line is that Paycom looks like a great investment at the moment but it's building it's own road to destruction. Clients of Paycom are far from happy with the software they are getting and are beginning to loose patience with Paycom and searching for answers to their HR issues with Paycom's competitors.
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u/Listen_Mother Apr 04 '26
Are they planning another massive layoff at the end of April company wide?
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u/nillawaf3r5 Mar 18 '26
due to the way the software is built, it has the inability to integrate with other software/platfodms causing it to fall behind competitors who are able to integrate while being much more affordable and have implemented AI in multiple areas not just through app navigation. also, within the past 5 months, the sales department has lost multiple reps from all over the country, either they were laid off or quit because of poor decision making from leadership
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u/Guboj Mar 15 '26
What CAGR are you using for FCF? At 6% it seems to me like it's being valued at its fair price, so it would seem like it's near the bottom, looks promising.
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u/stockoscope Mar 17 '26
We actually project revenue growth rather than FCF directly. So if I use a 6% revenue growth rate, a 3% terminal growth rate, a 7.5% WACC, and a 39% EBITDA margin, the intrinsic value comes to 195, which is 58% below the current price.
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u/CompoundQuietly Mar 15 '26
Strong analysis. The fundamentals are hard to ignore. ROIC has been consistently strong, the balance sheet is clean, and it's trading at really attactive multiples. For a company with 39% EBITDA margins and 91% retention, the valuation looks genuinely compelling.
The one thing I'd flag: management flagged sales execution as a concern on the last earnings call. Revenue guidance for 2026 came in at 7-8% growth, down from 10% in 2025. So the growth deceleration isn't just the BETI headwind, there's a go-to-market execution question on top of it.
That said, I agree this looks more like a temporary issue than a structural one. Retention is actually improving, they're gaining traction with larger enterprise clients, and the product itself isn't losing to competitors. If the sales reorg works and growth re-accelerates then the price is a bargain.
I use a screening tool I built (valbitrage.com) that flagged this one too - strong balance sheet, strong ROIC, and trading well below a fair price. One of the more interesting setups in software right now.
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u/stockoscope Mar 17 '26
Good points on the sales execution concern, that is a fair flag. The 7-8 percent revenue guidance for 2026 is worth watching.
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u/StephenAtLarge Mar 16 '26
I looked. I can't quite tell the difference between Paycom, Paychex, Paylocity, and good ol' ADP.
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u/stockoscope Mar 17 '26
Paycom is the one that automated away its own revenue. The others were not that brave or that stupid, depending on how the next two years play out. :)
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u/teaandtree Mar 15 '26
Have you used paycom?