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Is Paycom a Good Human Capital Management (HCM) Software Stock to Buy?

Leading human capital management software provider Paycom Software (PAYC) reported strong top-line growth in its last reported quarter. However, its stock has slumped nearly 38% in price over the past month. So, is it worth betting on the stock now, considering the recent sell-off in the tech sector? Let's discuss.

A pioneer in payroll and HR technology, Paycom Software Inc. (PAYC) is an Oklahoma City, Okla.-based cloud-based software solution provider that enables companies to manage a rapidly changing business environment successfully. The company's differentiated solutions and go-to-market strategy helped it deliver strong earnings results in the last quarter.

However, the stock is down 16.2% in price over the past six months and 19.2% over the past month to close yesterday's trading session at $335.30. In addition, the stock is currently trading 40% below its 52-week high of $558.97.

Furthermore, the market has been hammering tech companies recently because investor sentiment has shifted in anticipation of the Fed's forthcoming interest rate hike. Also, under the Fed’s hawkish new monetary policy of decreasing liquidity and raising interest rates, growth companies in this space have become less appealing.

Click here to check out our Software Industry Report for 2022

Here is what could shape PAYC's performance in the near term:

Strong Profitability

PAYC's 17.3% net income margin is 166.7% higher than the 6.5% industry average. Also, its gross profit margin, levered FCF margin, and ROC are 76.1%, 79.9%, and 249.5% higher than their respective industry averages. Also, its $282.52 million in cash from operations is 138.2% higher than the $118.6 million industry average.

Premium Valuations

In terms of forward non-GAAP P/E, the stock is currently trading at 71.27x, which is 231% higher than the 21.53x industry average. Also, its 17.46x forward EV/Sales multiple is 368.9% higher than the 3.72x industry average. Moreover, PAYC's 17.58x forward Price/Sales is 386.4% higher than the 3.61x industry average.

POWR Ratings Reflect Uncertainty

PAYC has an overall C rating, which equates to Neutral in our proprietary POWR Ratings system. The POWR ratings are calculated by considering 118 distinct factors, with each factor weighted to an optimal degree.

Our proprietary rating system also evaluates each stock based on eight distinct categories. PAYC has a D grade for Value and Momentum. The company's higher than industry valuation is in sync with the Value grade. In addition, the stock is currently trading below its moving averages of $392.89 and $418.75, respectively, indicating a downtrend.

Among 171 stocks in the F-rated Software – Application industry, PAYC is ranked #36.

Beyond what I have stated above, one can view PAYC ratings for Growth, Stability, Quality, and Sentiment here.

Click here to check out our Software Industry Report for 2022

Bottom Line

Technology companies like PAYC have been witnessing heightened demand for their product and services over the past year as companies across industries adjust to the remote working environment. However, given the heightened industry-wide competition, the recent market sell-off in the tech sector, and PAYC's premium valuations, we believe investors should wait for a better entry point in the stock.

How Does Paycom Software Inc. (PAYC) Stack Up Against its Peers?

While PAYC has an overall C rating, one might want to consider its industry peer Open Text Corporation (OTEX), Commvault Systems Inc. (CVLT), and Rimini Street Inc. (RMNI), which has an overall A (Strong Buy) rating.

PAYC shares rose $2.70 (+0.81%) in premarket trading Tuesday. Year-to-date, PAYC has declined -19.24%, versus a -5.27% rise in the benchmark S&P 500 index during the same period.

About the Author: Pragya Pandey

Pragya is an equity research analyst and financial journalist with a passion for investing. In college she majored in finance and is currently pursuing the CFA program and is a Level II candidate.


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