Adoption Of Beti Will Strengthen Client Retention And Drive Future Success

Key Takeaways

• Paycom's automation focus is expected to drive growth by boosting client efficiency, cutting costs, and improving net margins.
  
• Beti's adoption and new sales offices may enhance client retention, increase market share, and support revenue and earnings growth.
  
• Challenges in client acquisition, retention, and tax rate increases may constrain Paycom's revenue and profitability growth.

Catalysts

Provides cloud-based human capital management (HCM) solution delivered as software-as-a-service for small to mid-sized companies in the United States.

• Paycom's focus on full solution automation and client ROI achievement is expected to drive future revenue growth by eliminating non-revenue-generating tasks and increasing operational efficiency for clients.
  
• The success and adoption of Beti, Paycom's differentiated automated payroll solution, is likely to enhance client retention and attract new clients, supporting higher recurring revenues and potentially improving net margins due to reduced service costs.
  
• Internal efficiencies gained from product automation, such as the AI agent's impact on service team processes, are expected to reduce operational costs and positively impact net margins.
  
• The opening of new sales offices, backed by a deep bench of sales leaders, is projected to accelerate sales growth and contribute to increased revenue and market share in 2025 and beyond.
  
• High demand for Paycom's automated solutions, as evidenced by strong sales performance, is anticipated to contribute to steady revenue growth and improved earnings due to higher client acquisition and retention rates.

Paycom Software Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Paycom Software's revenue will grow by 9.4% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 26.7% today to 21.6% in 3 years time.
• Analysts expect earnings to reach $534.0 million (and earnings per share of $9.5) by about April 2028, up from $502.0 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 27.5x on those 2028 earnings, up from 24.6x today. This future PE is greater than the current PE for the US Professional Services industry at 21.1x.
• Analysts expect the number of shares outstanding to decline by 1.01% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.57%, as per the Simply Wall St company report.

Paycom Software Future Earnings Per Share Growth

Risks

• Paycom's annual client growth rate was only 2%, indicating potential challenges in acquiring new clients or expanding within existing markets, which could limit revenue growth.
  
• Interest on funds held for clients is expected to decrease by 12% year-over-year, which could negatively impact overall earnings.
  
• The transition to annual revenue and adjusted EBITDA guidance suggests potential challenges in forecasting quarterly results, which might indicate volatility in revenue streams.
  
• The revenue retention rate remained flat at 90%, suggesting possible issues with client retention or competitive pressures impacting recurring revenues.
  
• The increase in expected tax rates from 23% to 29% on a GAAP basis could reduce net income and overall profitability.

Valuation

• The analysts have a consensus price target of $224.89 for Paycom Software based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $278.0, and the most bearish reporting a price target of just $187.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $2.5 billion, earnings will come to $534.0 million, and it would be trading on a PE ratio of 27.5x, assuming you use a discount rate of 6.6%.
• Given the current share price of $220.9, the analyst price target of $224.89 is 1.8% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.