Updating Moat Ratings and Fair Value Estimates for Payroll Firms

We conducted a comprehensive review of Morningstar Economic Moat Ratings across our global technology and technology-adjacent coverage universe of more than 130 companies. In doing so, we updated our moat ratings and fair value estimates for our payroll sector coverage.

Why it matters: The rapid advancement of large language models and agentic artificial intelligence is likely bringing in a new technology paradigm that fundamentally alters the competitive dynamics for many businesses. We have stress-tested our moat ratings against this new reality.

• We see key risks for payroll firms via a combination of more application layer economics, less evidence of current AI monetization, and exposure to seat-based pricing. This brings heightened uncertainty to the return structure over the next 10-20 years.
• We still see evidence of complexity in workflows, notably needing to get tax law implemented correctly across numerous jurisdictions, along with a heavier regulatory burden and less room for error as companies still need to get payroll right.

The bottom line: We are downgrading our moat ratings for ADP and Paychex to narrow from wide. We are downgrading our moat rating for Paycom to none from narrow. Our lower fair value estimates are $231 for ADP (from $297) and $90 for Paychex (from $122). We maintain our $130 fair value estimate for Paycom.

• Because this was our first “post-AI” update for ADP and Paychex, the hit to our valuations was a bit larger. We had already started to bake in a higher likelihood of slowing growth for Paycom following its recent fourth-quarter earnings report, when we lowered our fair value estimate to $130 from $208.
• This puts the companies in 3-star territory, with implied forward earnings multiples now below their historical five-year ranges. The primary changes we made were to lower our revenue growth assumptions to roughly a mid-single-digit compound annual growth rate and lower our stage two length and growth.