Analyst Note| Nupur Balain |
Narrow-moat Paycom Software posted a strong end to fiscal 2020, as revenue and adjusted EPS exceeded our expectations and the high end of management's prior guidance. With "hiring now" ads rising to pre-pandemic levels and a Democratic government promising more fiscal stimulus, we expect to see a recovery in the labor market. This recovery bodes well for Paycom as it charges on a per-employee basis. Much like our reassessment of Paylocity Holding's medium-term growth prospects, we think Paycom also has a strong growth runway ahead. With its focus on small companies with 50 to 2,000 employees, we expect to see material growth in the firm's client count. Due to the time value of money as we roll our valuation model, the firm's impressive quarter, and a change in our view of the firm's long-term profitability and cost management, we are raising our fair value estimate for narrow-moat Paycom to $306 per share from $217 per share. With shares trading at more than $420 per share, we recommend investors wait for a pullback before committing capital to the name.