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The coronavirus pandemic is not over yet, but events are moving in the right direction. Every day more and more vaccines are being administered, more and more people are being vaccinated, and things are gradually returning to normal.

However, the shock caused by COVID-19 caused a large wave of layoffs, with many people leaving their jobs in search of better opportunities. In other words, it is more important than ever for businesses to recruit and retain the best talent. And Paycom (NYSE: PAYC) can help them with this. Here’s what investors should know about this company.

Market opportunities

Paycom provides cloud-based Human Capital Management (HCM) software. Its end-to-end platform goes beyond human resources (HR) management, covering all stages of the employee lifecycle – from hiring to retirement. This includes applications for hiring, scheduling, benefits, payroll, and more.

Most organizations nowadays rely on several vendors of this kind of software to try to integrate their products into a complete HCM solution. However, this approach tends to be expensive and complex, as it is often difficult to integrate disparate systems and datasets.

In comparison, Paycom’s solution is based on a single registration system, which eliminates the need to maintain multiple databases. In addition, Paycom provides employees with self-service technology, further reducing the burden on HR administrators. For example, the company just launched the industry’s first employee-centric payroll software that automates the payroll process by allowing employees to sign their own checks.

The HCM market was valued at $ 16.7 billion in 2020, according to Mordor Intelligence, but that figure is expected to grow 6.7% annually, reaching $ 24.6 billion by 2026. To assess these numbers in the context of a company’s niche, let’s take a look at Paycom’s financials along with those of its competitors.

Financial performance

According to the latest G2 Grid report, Paycom ranks fourth in HCM market share after competitors Workday, Paylocity and Automatic Data Processing (ADP)

However, keep in mind that Workday is mainly focused on large enterprises, while Paycom focuses on small and medium businesses (with 50-5,000 employees). Thus, these two companies occupy different niches in the market. And if we compare Paycom with ADP and Paylocity, then its indicators are growing noticeably faster (see the table below), which indicates that the company’s business is gaining momentum.

CompanyQ1 2018 (TTM)Q1 2021 (TTM)CAGR
ADP$ 13.1 billion$ 14.7 billionfour%
Paylocity$ 357.0 million$ 598.8 millionnineteen%
Paycom$ 467.5 million$ 871.3 million23%
SOURCE OF DATA: ADP, PAYCOM, PAYLOCITY SEC FILINGS; TTM – 12 months moving average; CAGR – compound annual growth rate

So what is driving this growth? First, Paycom has established good customer relationships. As part of its retention strategy, the company assigns each customer an individual service technician, thus providing access to personalized support. So far, this one-on-one strategy has paid off.

Paycom invoices customers on a monthly basis (or even more often), which means there are no long-term contracts and customers can leave at almost any time. However, according to management, the average customer stays with the company for 10 years.

In fact, the company’s customer retention rates were 93%, 93% and 92% in 2020, 2019 and 2018, respectively. This means Paycom maintained excellent customer retention throughout the pandemic, despite massive factory closures (at least in the US and Europe) and double-digit unemployment rates.

These financial metrics demonstrate to investors the value and reliability of the HCM Paycom platform.

Paycom Stock Chart

Perspectives

Paycom’s current revenue is less than 4% of the $ 16.7 billion HCM market (2020). Naturally, the company can potentially count only on the development of a part of this amount, since it specializes in small and medium-sized businesses.

According to the US Census Bureau, in 2018, 241,843 businesses employed 50 to 5,000 employees. In comparison, Paycom currently serves 31,000 customers, or 13% of the aforementioned number of businesses. However, the data provided by the US Census Bureau may have changed over the past two years, especially during the coronavirus pandemic.

Assessing a company’s market opportunity always involves a certain amount of guesswork. But in any case, Paycom clearly has many opportunities to grow its business. And if a company can sustain revenue growth in the 20% to 30% range, I wouldn’t be surprised if its stock doubles or even triples by the end of 2025.

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