Paycom's stock craters toward worst day on record as former bulls head for the hills

By Emily Bary

At least seven analysts downgrade Paycom shares following 'surprising' reset

At least seven former bulls just cut bait on Paycom Software Inc. shares, which were melting down Wednesday after the company delivered a grim growth forecast.

Paycom's (PAYC) projection for 10% to 12% revenue growth next year was essentially half of what analysts had been projecting heading into the company's third-quarter report. Management noted that the company's Beti payroll product was cannibalizing some other services.

See more: Paycom's stock plunges as payroll company whiffs on earnings outlook

"In our view, Paycom has become a transition story and there are challenges looming to reinvigorate its top-line growth since a rebound in the hiring market is unlikely to occur anytime soon given the macro and geopolitical uncertainties and the rate-cycle looks to be ending," wrote Oppenheimer's Brian Schwartz as he cut his rating on the stock to perform from outperform. "This means the business is heading to an average industry growth trajectory and multiples."

Schwartz also scrapped his prior $400 price target on Paycom shares, which were plunging more than 36% in Wednesday morning action to a recent $156. Shares were also on pace for their worst single-day percentage decline on record, according to Dow Jones Market Data.

Piper Sandler analyst Arvind Ramnani also moved to the sidelines on Paycom shares, noting that revenue growth could be in the 10% range next year, whereas it was upwards of 25% previously. Plus, the company may need to make operational tweaks to preserve margins, Ramnani said.

"It is feasible that some of these strategic investments are requisite ingredients that will lead to improved growth in the mid-long term; however, we would want to see evidence of that improved growth to be constructive," he wrote, lowering his rating to neutral from overweight and slashing his target price to $185 from $399.

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William Blair's Matthew Pfau left the bull camp as well.

"We previewed that we thought there could be some risk into the third quarter given Beti could result in conservative guidance; however, the magnitude of the reset is surprising," he wrote. "We believe that management has likely sufficiently lowered the bar for 2024 revenue and that there is probably upside, although how much is hard to tell at this point."

Pfau also mentioned "uncertainty around how margins will look in 2024," which he said adds risk to the stock. He downgraded shares to market perform from outperform Wednesday.

DA Davidson analyst Robert Simmons, meanwhile, stayed bullish and advised investors to "buy the selloff."

"If the strategic explanation related to short-term BETI headwinds that will turn into positives is correct, and also the statements that new business wins and industry demand are strong, there's strong upside potential; if not, downside does look limited," he wrote, while keeping a buy rating but reducing his target price to $225 from $330.

-Emily Bary

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11-01-23 1025ET

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