May 19, 2024

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This Disruptive Company Has Explosive Growth Potential

Paycom Software (NYSE:PAYC) has been at the forefront of disrupting the payroll sector since CEO Chad Richison founded the company in 1998. His company revolutionized the payroll process by taking it entirely online. It has continued to be a disruptive force over the years, developing a single cloud-based software solution to help companies manage all their human resources (HR) processes. 

The company’s latest innovation, Beti, is once again disrupting the industry by changing the entire payroll procedure. It’s helping drive explosive growth for Paycom, which could continue for years to come.

A person standing next to a chart with rising arrows and bars.

Image source: Getty Images.

A better payroll system

Richison discussed Paycom’s latest disruptive move on the fourth-quarter conference call. He noted that the company “extended our platform to the employee even further through innovations like BETI, which enables employees to do their own payroll, and we are seeing very strong adoption and record employee usage.”

The company sees Beti, which stands for Better Employee Transaction Interface, as the new way of doing payroll. The industry-first employee-driven payroll solution improves data accuracy, oversight, and user experience. It puts the payroll responsibility into the hands of employees, eliminating a multistep, imperfect, and time-consuming process for HR departments while giving employees more insight into their pay. 

Richison stated on the call:

For years, I have been predicting the end of the old model, whereby HR and payroll personnel’s routine of inputting data for employees, is replaced by a self-service model that provides employees direct access to the database. The old model is dying and that is good for both the business and the employee. Paycom is leading this transformation.

That’s just the latest innovation from the company. The company’s single-database HR platform works better than the cobbled-together systems that most companies use today. That has enabled Paycom to capitalize by offering companies an easy-to-use system that improves user experiences, allowing them to maximize the return on this investment in Paycom’s software. 

An unstoppable growth driver

This award-winning solution has been a smashing success. It helped drive record annual revenue retention of 94% in 2021, up from 93% in the prior year. It was also a key growth driver. The company ended the year with nearly 34,000 clients, up 9% compared to 2020. Meanwhile, revenue surged 29% year-over-year in the fourth quarter and 25.4% for the full year. Earnings grew even faster as its margin expanded despite aggressive spending to grow the business. The company delivered an adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) margin of 39.7% of its revenue in 2021, up from 39.3% in 2020. 

Paycom is only scratching the surface of its potential. Richison noted on the call that “we still only have approximately 5% of the TAM (total available market) today, so there’s plenty of runway ahead to expand and continue to capture market share.” It’s investing heavily to continue taking more market share. It opened five new outside sales offices over the last five months (Manhattan, Las Vegas, Jacksonville, New England, and South Jersey) — bringing the total to 54 — to expand its geographic reach. In addition, it has expanded the upper end of its target client size from those with up to 5,000 employees to those with upwards of 10,000 employees. 

These catalysts have Paycom positioned to continue growing fast in 2022 and beyond. The cloud-based software company sees its revenue rising to more than $1.3 billion this year, putting it up nearly 25% from last year’s total. Meanwhile, it sees a further improvement in its adjusted EBITDA margin to around 40% this year, suggesting continued strong profit growth.

Lots of growth still ahead

Paycom continues to disrupt the payroll industry by launching innovative software solutions that improve the process. While it has grown tremendously over the years, it still has lots of room to run. That upside potential makes it a stock that investors won’t want to miss.   

 

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.