William Blair initiated research coverage of Paycom Software, Inc. (PAYC $310.80), a cloud human capital management provider that targets businesses with 50 to 10,000 employees.
Analyst Matthew Pfau estimated that the company would generate sales of $1.7 billion in 2023 and $2.1 billion in 2024, up from $1.4 billion in 2022.
“Paycom was founded in 1998 and went public in 2014,” said Pfau. “The company provides SaaS payroll and HR solutions to businesses based in the United States. Paycom was one of the first vendors to provide a cloud payroll solution, and over time has become one of the largest payroll and HCM vendors to the midmarket, only second to ADP based on employees, in our estimation. The company has expanded its target market over time and now targets businesses with 50 to 10,000 employees, which is up from 50 to 2,000 at the time of its IPO. Similarly, the company’s product suite has expanded though the years, with it being currently at 30 paid modules, and Paycom has had good success selling more modules to customers. Paycom’s broad suite helps address the expanding role of HR departments, which require more efficient and flexible applications and tools than those offered by legacy payroll service providers. Paycom’s solutions manage the complete employment lifecycle, from recruitment to retirement, and include the following categories: HR management, payroll, talent acquisition, talent management, and time and labor management solutions.
“From a dollar perspective, we believe that Paycom is only 4% penetrated in its addressable market,” added Pfau. “In our view, Paycom can grow revenue 20% or greater over the next several years due to its strong product set and sales execution, as well as a continued HR software investment cycle. We also believe that global HCM and payroll create nice long-term optionality. Although we expect Paycom’s adjusted EBITDA margin, excluding impact of float, to remain relatively flat over the next year or two as the company invests in market share gains, driven by both salesforce and product expansion, we believe there is more room for expansion longer term. We also expect to see improvement in free cash flow conversion over the next several years.”
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