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2 Pricey Payroll Processors

Narrow-moat Paycom and Paylocity have taken market share from competitors, but investors should wait for a pullback.

2 Pricey Payroll Processors
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John Barrett: Last month, we initiated coverage of narrow-moat, payroll processors Paycom and Paylocity with fair values of $173 and $82, respectively. We think both companies are modestly overvalued right now, but we awarded them a narrow moat due to switching costs.

Paycom and Paylocity are similar businesses that offer payroll processing and human capital management software to small to medium-size businesses. The target employee count for Paycom and Paylocity is 100 to 1,000 employees. Both are fast-growers with over 20,000 customers and have been taking share from incumbents ADP and Paychex. The companies’ native cloud software with unified database architecture provide an improved user experience compared to its competitors. For this reason, roughly half of Paycom and Paylocity’s new customers are conversions from either ADP or Paychex. Unlike many of their software peers, both companies are already profitable and should be able to attain some additional operating leverage as they continue to grow double digits.

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John Barrett does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.