Paycom Earnings: Self-Service Payroll Cannibalizes Revenue and Upsells Stall but Shares Look Cheap

We lower our fair value estimate for Paycom PAYC to $295 from $370 per share following the release of mixed third-quarter results and underwhelming preliminary guidance for fiscal 2024. Paycom is facing ongoing difficulty converting the remaining third of existing clients to the firm’s flagship self-service payroll solution, Beti, while simultaneously facing headwinds from nonrecurring service revenue cannibalization. Following the result, we have lowered our long-term revenue per client assumptions, dragging on both top-line growth and profitability expectations. While the outlook has soured for Paycom, we continue to believe the business benefits from high customer switching costs underpinning our narrow moat rating, and we view the firm as well placed to take a further share of the expansive payroll and HCM market. Despite a sharp fall post-release as low as $166, Paycom shares remain attractive relative to our updated fair value estimate.

Paycom’s laser focus on driving automation and self-service payroll appears to have become a double-edged sword for the firm. Beti continues to be a key drawcard for new clients looking to reduce costly payroll errors and improve efficiency and has supported stickier clients and margin uplift for Paycom. However, increased accuracy through automation and employee engagement has been at the expense of Paycom’s revenue tied to ad hoc payroll correction services. Simultaneously, conversion resistance among remaining clients appears increasingly structural, and we now expect Paycom will need to service duplicate payroll platforms and enjoy lower module adoption over the long term, limiting operating leverage relative to our prior forecasts.