I see PAYC is down 5.5% in after hours trading which doesn’t line up with fantastic results. Any comments on why? I do see a distinct downward trend in earning the past few quarters (sequentially), which is not exactly inspiring though I have not looked at the reason.
Here’s a TMF article that addresses this: http://www.fool.com/investing/2016/11/02/is-this-why-paycom-…
I think it’s interesting to compare PAYC to other companies with similar business models.
Rev Growth numbers are very rough, but here’s how I look at it:
Company Rev Growth P/S Ratio
SHOP 90% 10.4
PAYC 45% 8.2
HUBS 50% 7.6
VEEV 35% 11.6
Based on this, VEEV looks incredibly expensive comparatively (the main reason I sold my shares). PAYC looks like a relative steal, especially if you believe it will continue to grow at a 40-50% pace. HUBS looks even cheaper, but they don’t have earnings yet, so that’s a complicating factor. But in my opinion, SHOP looks cheaper still with that insane growth rate. (Obviously there are judgement calls to make.)
But all these P/S ratios are high. PAYC grew revenue at 40% this quarter instead of 50% like last quarter. If you believe that will come down to 30% next quarter, and then 20%, etc, then selling is the right thing to do. I think there is a lot of that kind of fear baked in today. But let’s consider whether or not is is reasonable. First we have to remember that almost all their revenue is recurring, as opposed to a SKX or INFN or TWTR or something. Take SKX for example. It was actually quite prudent to think they would not keep growing at 30% like they did in 2014 and 2015…and I think I can explain why:
Every quarter, a company like SKX has to find a whole new group of people who need to buy a pair of shoes. Even if people like them enough to buy them again and again, most people don’t buy shoes on schedule exactly every three months. In other words, none of their revenue is recurring. But for companies with a subscription model, each and every quarter they get all the recurring revenue from the previous quarter, PLUS any new sales. They’d literally have to have 0 sales to not grow.
I bring all this up because revenue growth is so crucial for growth companies. Look what happened to TWTR, SKX, INFN, etc when growth slowed. To whom much is given, much is expected, and TWTR’s PS of about 5 will be PAYC’s fate as well if growth slows to 20%. My position is simply that that isn’t going to happen. And if they grow at 45% or 50% next quarter, you can bet that the stock will shoot up. I don’t know that that is likely either, but I think with a middle road, they will acheive great appreciation in time. Time will tell.
This is how I see it. Interested to know if anyone agrees or disagrees.