Paylocity Stock: Why I Won’t Pay For This Stock (NASDAQ:PCTY)

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Paylocity Holding Overview

Paylocity (NASDAQ: PCTY) is a US-based cloud-based company that provides both payroll and human capital management (“HCM”) solutions. HCM solutions include time and attendance, recruiting software, workplace collaboration, and communication tools. They mainly target companies with 10 to 5000 employees.

Industry Outlook

I believe the payroll and HCM solutions industry is expected to grow at a decent pace. There are many digitization trends in this industry which I believe will give a boost to the expansion of the industry. Some important trends are:

  • The COVID pandemic has made employers aware of the benefits of digitizing payroll and HCM solutions
  • Cloud transformation
  • The growing need for cybersecurity
  • Need for employee confidentiality
  • Integrating AI and automation into payroll and HCM solutions

According to Future Market Insights, the global market for payroll and HR solutions and services is expected to reach $58.3 billion by 2032, growing at a healthy CAGR of 7.7%.

Competition

As the industry outlook is excellent, many (potential) competitors are trying to take their piece of the pie. I believe Payroll and HCM solutions are a competitive and fragmented industry. For each of the products, Paylocity has many different rivals, but these are mainly payroll and HR software and service providers, including automatic data processing, Paychex, Paycom Software, Paycor, Ultimate Kronos Group and others local and regional suppliers:

Company

activity Descrition

Market capitalization

Last year’s revenue growth

Paylocity Holding (PCTY)

Paylocity is a US-based cloud company that provides both payroll and human capital management (“HCM”) solutions. HCM solutions include time and attendance, recruiting software, workplace collaboration, and communication tools. They mainly target companies with 10 to 5000 employees.

10.78B

13.24%

Paycom software (PAYC)

Paycom is a fast-growing provider of payroll and human capital management, or HCM, software that primarily serves US companies with between 50 and 10,000 workers. Around 16,000 customers are served by Paycom, which was founded in 1998.

19.55B

25.44%

Paychex (PAYX)

Paychex is a well-known provider of insurance, HR, and payroll services, especially for small and medium-sized businesses in the United States. More than one in 12 Americans employed in the private sector is employed by the company founded in 1979, which serves more than 730,000 customers.

44.07B

13.68%

Automatic Data Processing (ADP)

ADP serves a wide range of organizations, from small startups to large multinationals, by providing payroll and human resource management solutions. More than 920,000 customers are served by ADP, which was founded in 1949 and is based primarily in the United States.

92.05B

2.85%

Competitive position

I believe the following are the main competitive elements on which Paylocity competes in its market:

  • Products designed to interact with today’s workforce;

  • A complete platform of payroll and human capital management products;

  • Depth and breadth of product capabilities;

  • Configurability and ease of use of the solutions;

  • A contemporary, mobile, consumer-centric and intuitive user experience;

  • Benefits of a platform for cloud-based technologies;

  • The ability to grow and act quickly in response to customer demands;

  • Knowledge of the domain in HCM and payroll;

  • Customer service and quality of implementation;

Most of them are directly or indirectly related to the customer experience using the solutions. Thus, I reviewed how the solutions are perceived by others:

At the G2 2022 Best Software Awards, Paylocity made both the Best HR Products and Best Software Products lists, appearing on both lists for the third year in a row. G2 indicates that

By combining consumer-centric experiences with an automated all-in-one platform that streamlines and automates manual HR tasks, Paylocity customers achieve better retention and engagement results, which ultimately , promotes the success of the company.

The ability to grow and act quickly in response to customer demands is evidenced by some of its flagship products. One example is the focus on new features related to workplace diversity and inclusivity, according to G2:

Paylocity has added a range of enhancements to its platform to help inform and equip customers’ Diversity, Equity, Inclusion and Accessibility (DEIA) efforts. These tools provide HR professionals with data-driven insights to better understand the needs of their workforce, foster a more inclusive employee experience, and measure impact.

When analyzing Paylocity reviews, many aspects of the list of competitive items can be checked off, such as ease of use, intuitive one-stop-shop platform, and product depth.

However, many users have criticized its customer support. Additionally, several users have complained about the change in account managers. One comment said they were on their third account manager in six months. This could potentially indicate a competitive environment for employee retention.

While Paylocity appears to offer a robust solution, two competitors ranked higher in the G2’s top HR products, namely ADP and Paycom.

These two competitors tick most of the things mentioned on the list of competitive items. Paycom users are also more positive about its customer support. Even more interestingly, no user complained about changing account managers.

Another factor that may weigh on the competitive position of Paylocity is its much lower market capitalization compared to its competitors, as discussed in the previous section. Many competitors have access to more financing for the creation, marketing and sale of their goods and services.

All in all, I think Paylocity has a robust solution that could effectively compete in the fierce competition. However, I don’t think Paylocity will dominate its competition due to its strong offering, reputation, and resources.

Valuation and performance

I have calculated several evaluation and performance statistics for Paylocity and its competitors:

Company

EP before

Gross margin

Free Cash Flow Margin

Sales growth over 3 years

EPS growth over 3 years

Debt Equity

Paylocity Holding

73.53

66.04%

11.96%

19%

22%

0.13

Paycom software

53.76

84.69%

19.11%

23%

16%

0.03

Payment

27.78

70.59%

29.77%

seven%

ten%

0.29

Automatic data processing

28.49

42.38%

14.62%

4%

12%

0.79

Source: Alpha Research

Paylocity is the most expensive company among its peers, yet it has the highest EPS growth and sales growth in the top 2.

Arguably Paylocity’s most comparable competitor, Paycom, is much cheaper while having higher sales growth, lower debt levels, and a much higher gross margin and free cash flow margin. The other two competitors are difficult to compare, as they are much cheaper but also have lower growth rates.

Final grip

I believe the payroll and HCM application industry will grow at an attractive rate. In my opinion, Paylocity seems to offer a robust solution to capture some of the market opportunities. Still, other competitors with more resources are ranked higher by the ratings and thus will be a tall order. Additionally, Paylocity is priced significantly higher than its most comparable competitor, Paycom, while having lower margins and sales growth. Due to these factors, I have set the recommendation for Paylocity to “Hold”.

About Yvonne Lozier

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