TriNet Group: We Initiate Coverage With a Narrow Moat and $145 Fair Value Estimate

We are initiating coverage of TriNet TNET with a $145 fair value estimate and narrow moat and High Uncertainty Ratings. TriNet offers outsourced payroll and human capital management, or HCM, solutions for small and midsize businesses, primarily via a professional employer organization, or PEO, model. We expect TriNet and fellow HCM providers to benefit from attractive industry tailwinds, including rising regulatory complexity, increasingly dispersed workforces, and fierce competition for talent. In the context of these industry tailwinds, we expect greater penetration of the PEO service model within the broader payroll and HCM market as SMBs look to leverage PEO providers’ scale and expertise to access HR compliance support and competitive employee benefits, and share employment risk liability via a co-employment arrangement. At current prices, TriNet shares screen as attractive, trading at a sizeable 20% discount to our fair value estimate.

We believe TriNet has garnered a narrow economic moat underpinned by high customer switching costs. Payroll and HCM solutions are mission-critical and are typically deeply embedded in a business’ operations, making it a costly and time intensive process to switch providers. In our view, these switching costs are amplified for clients engaged in a co-employment service model as services such as access and administration of employee benefits, and critical day-to-day HR functions such compliance and risk management, collecting and remitting payroll taxes and time intensive administrative tasks are outsourced or reliant on the PEO provider. Switching costs faced include having to secure comparable employee benefits without the advantage of the PEO’s scale, forgoing the benefit of shared employment risk liability, and the risk of losing data, payroll and compliance issues, and employee dissatisfaction.