Is Paycom Software Stock a Buy Now?

Shares of Paycom software (PAYC 0.28%) have risen sharply to a 52-week high after a better-than-expected quarterly update. The human capital management (HCM) software giant has seen success integrating new automation solutions that support improved growth prospects.

With the stock still down 60% from its record peak in 2021, could this recent recovery spark a sustainable turnaround in 2025 and beyond? Let’s see if Paycom stock could be a good addition to your portfolio right now.

AI-powered growth

Within the HCM industry, Paycom Software stands out for its complete suite of HR and payroll management tools in an all-in-one platform. The company benefits as companies of all sizes increasingly seek solutions that deliver operational and financial efficiencies.

Paycom has invested heavily in artificial intelligence (AI) to build leadership in automation, focused on differentiating from the competition and delivering value to customers. Ultimately, multiple systems within the ecosystem that simplify traditionally time-consuming workflows and reduce costs represent a product that should sell itself.

In the third quarter, revenue rose 11% year over year, while adjusted earnings per share (EPS) of $1.67 beat the average Wall Street estimate by $0.06. Adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) were $171 million, up 3% from last year, as continued capital expenditures in areas such as AI and continued international expansion have tightened margins.

Perhaps the bigger story was the strong management guidance that fueled the continued momentum. For 2024, Paycom expects total revenue growth of approximately 10%. The company is also targeting adjusted EBITDA between $745 and $752 million, representing a 4% increase over 2023 results. Notably, this estimate was raised from a previous guidance of $727 million to $737 million.

The trends, including high customer retention, point to a solid setup for Paycom in 2025 and beyond. The fundamentals are strengthened by the growing base of recurring cash flows and a debt-free balance sheet position.

Data source: Paycom Software, YOY = year over year.

Is Paycom undervalued?

There’s a lot to like about Paycom Software in what is recognized as a highly competitive HCM landscape. Historically, the company has specialized in small and medium-sized businesses but has made efforts to acquire larger customers. With a current presence in over 180 countries, management still sees a significant opportunity to increase its market share, especially with the focus on automation and AI features as a key selling point.

Paycom shares trade at 17 times consensus 2024 EBITDA level as a ratio of enterprise value to future EBITDA. This level marks a discount for colleagues such as Automatic data processing, Working day, PaychexAnd Affordability with an average earnings multiple closer to 22. While every company has its differences, Paycom appears undervalued and has room for more upside potential even after the rally in recent months.

If there is reason for some caution, the question mark is how conditions on the labor market will develop. In the United States, job growth has slowed in recent months, with the possibility of further weakness in 2025, posing a risk to Paycom’s growth prospects as customers begin to push back on workforce expansion, which is a key growth driver for HCM companies.

PAYC EV ​​to EBITDA (forward) data by YCharts

Decision time on Paycom shares

I think Paycom Software is a buy now, with a good chance the stock price will be higher this time next year. Management’s ability to continue executing its strategy within a resilient macroeconomic environment could ensure results exceed expectations as part of the bullish scenario. The stocks can work for investors within a diversified portfolio.