Paycom Earnings: Margins Continue to Impress, but Decelerating Growth a Concern

Narrow-moat Paycom reported solid first-quarter results, in which revenue grew 7.8% year over year, in line with consensus estimates, and adjusted EBITDA margins expanded 270 basis points, well above analyst expectations. Additionally, management reaffirmed full-year revenue guidance with annual growth expectations of 8% and increased full-year adjusted EBITDA guidance from 41% to 42%. In conjunction with earnings, we also reinitiate and transfer the coverage of Paycom to a new analyst. We think Paycom is in a unique situation where its offerings are likely too high-end for small businesses while perhaps not comprehensive enough for larger enterprises. After reviewing the business, we reduce our fair value estimate to $203 per share from $211, as we now forecast a faster deceleration in revenue than previously expected. Accordingly, we see shares as overvalued.