Company Reports

We maintain our $145 fair value estimate for narrow-moat TriNet following a difficult quarter as higher insurance costs weighed on profitability. Shares fell a sharp 16% after release as adjusted earnings per share of $2.16 came in within guidance but was 10% below consensus estimates. We believe the market has overreacted to these headwinds as TriNet will work to pass on higher insurance costs through regular quarterly customer repricing. Further, while health insurance utilization is up significantly from pandemic-era lows, our valuation model already factors in a more normalized insurance cost ratio of 89% from 2025 onward. At current prices, relative to our unchanged valuation, TriNet shares screen as attractive on a risk-adjusted basis.

We view TriNet as well placed to take share of the expansive, fragmented small and midsize business payroll and human capital management market, through industry consolidation and rising demand for comprehensive, outsourced solutions. Regional providers or do-it-yourself solutions such as Intuit’s QuickBooks or Microsoft Excel service most of the small-business market, creating meaningful scope for greater penetration by value-added providers like TriNet.

We maintain our $145 fair value estimate for narrow moat TriNet following the release of reasonable fourth-quarter and full-year fiscal 2023 results, which marginally beat both our top-line forecasts and our profitability expectations. TriNet’s worksite employee base shrank year on year as customers curbed hiring and culled workforces amid challenging macroeconomic conditions and tighter access to credit, exacerbated by the firm’s heavy exposure to the small and medium business technology sector. Nevertheless, TriNet offset these headwinds and improved profitability through like-for-like pricing, a skew toward customers with higher product attachment, near-record-high client retention, and prudent cost control. Following the result, we maintain our longer-term outlook and continue to view shares as attractive.

We view TriNet as well placed to take share of the expansive, fragmented small and midsize business payroll and human capital management market, through industry consolidation and rising demand for comprehensive, outsourced solutions. Regional providers or do-it-yourself solutions such as Intuit’s QuickBooks or Microsoft Excel service most of the small-business market, creating meaningful scope for greater penetration by value-added providers like TriNet.

Narrow-moat TriNet reported mixed third-quarter results, with top-line growth falling short of our expectation and guidance but profitability exceeding our forecast due to a better-than-expected insurance cost ratio. Following the incorporation of these results, we have trimmed our full-year revenue growth forecast to flat year on year, down from our previous expectation of 2%. Nonetheless, our longer-term forecast and $145 fair value estimate are intact, and the shares continue to screen as attractive, trading at a 25% discount to our valuation.

We view TriNet as well placed to take share of the expansive, fragmented small and midsize business payroll and human capital management market, through industry consolidation and rising demand for comprehensive, outsourced solutions. Regional providers or do-it-yourself solutions such as Intuit’s QuickBooks or Microsoft Excel service most of the small-business market, creating meaningful scope for greater penetration by value-added providers like TriNet.

We are initiating coverage of TriNet 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 view TriNet as well placed to take share of the expansive, fragmented small and midsize business payroll and human capital management market, through industry consolidation and rising demand for comprehensive, outsourced solutions. Regional providers or do-it-yourself solutions such as Intuit’s QuickBooks or Microsoft Excel service most of the small-business market, creating meaningful scope for greater penetration by value-added providers like TriNet.