The value of Paycom Software's stocks soared by an impressive 25.5% in October.
The shares of Paycom Software (PAYC, decreasing by 0.12%) experienced a significant surge of 25.5% in October, as per data from S&P Global Market Intelligence. This tech company, specializing in web-based HR and payroll management solutions, boosted its revenue growth during the third quarter, continuing its trend of streamlining back-office responsibilities through automation. Following a summer slump, Paycom's shares have skyrocketed by over 45% in recent months, sparking investor excitement about the enduring software giant.
Let me explain why Paycom Software's share value improved this month.
Revenue growth recovery
On October 30, towards the month's end, Paycom reported its financial results for the third quarter of 2024. The company's revenue swelled by 11.2% year-on-year, totalling $451.9 million. Meanwhile, net income for the period remained constant at $73.3 million. This progress represented an acceleration in revenue growth compared to the previous quarter, where sales growth slowed to a mere 9% year-on-year.
Many investors had anticipated a substantial revenue decline for Paycom Software. Historically, the company saw robust double-digit growth, with figures hovering around 30% not so long ago. This third quarter marked the first indication of a slowdown, which was viewed as a positive sign by investors.
Management attested that the company is thriving with its cloud-based automation software, which significantly reduces workload for payroll and HR personnel. Moreover, Paycom now offers a quarterly dividend with a yield of nearly 1% and engages in share buybacks as another means of rewarding shareholders. As a financially stable entity, Paycom's cash flow has consistently expanded in the past several years, surpassing $300 million in the last 12 months.
What should investors do now?
Paycom's business is bouncing back, leading to its shares reaching new peaks. However, now the stock is priced at a more premium earnings multiple. In relation to its $12.3 billion market cap, shares are being traded at a price-to-free cash flow (P/FCF) of 41. This represents a significant jump compared to the standard for the S&P 500. This shift indicates that investors have shifted from pessimism to optimism towards Paycom stock.
That being said, this doesn't presuppose that investors should offload their shares today. Over the past five years, Paycom's free cash flow has amassed a total cumulative growth of 132%, while its revenue has climbed by a solid 147%. If this growth momentum persists, Paycom's free cash flow multiple will likely descend, and its stock will likely climb in value. It's advisable to remain patient as long as revenue and free cash flow continue their steady upward climb over the long term.
Given Paycom Software's strong financial performance, investors might consider reinvesting their dividends or buying more shares to increase their stake in the company. The company's consistently growing revenue and free cash flow, coupled with its commitment to reward shareholders through dividends and share buybacks, make it an attractive investment opportunity.
Considering the current premium pricing of Paycom's shares, some investors might choose to diversify their portfolio and invest in other companies with lower P/FCF ratios. However, given Paycom's historic growth trends and promising future prospects, long-term investors might see value in holding onto their shares, as they believe the company's free cash flow multiple will decline over time, leading to further share value appreciation.
