Paylocity (PCTY)

Paylocity (PCTY)

Summary:  On Sale

Score:  16/20

MOS:  80%

Share Price:  $291

Sticker Price:  $1,463

Is Paylocity stock a good buy?

Paylocity is a cloud-based payroll and human resources software company. They were founded in 1997 and are based out of Schaumburg, IL. Paylocity was one of the 5,000 fastest growing private companies according to Inc. Magazine in 2003, 2004, and from 2007 to 2014. They were also listed in Glassdoor’s Best Places to Work in 2019.

Here are some quick facts on Paylocity.

  • They have over 4,100 employees.
  • 60% of their workforce is remote.
  • They have over 28,750 clients.
  • They have over 2,200 channel partners including brokers, financial advisors, consultants, and associations.

Paylocity is a B2B SaaS that offers the following products.

  • Payroll (Expense, tax, and payments)
  • HR (Document library and compliance)
  • Benefits (Benefit management and administration)
  • Workforce Management (Time, attendance, and scheduling)
  • Talent Management (Recruiting, onboarding, and performance)

The last Tykr review conducted on Paylocity was completed on September 30th, 2020. At that time the score was 11/20 and the MOS was 80%. This tells us the financials have improved nicely over the last year.

Over September and October of 2021, the stock market experienced volatility but Paylocity reached all-time highs. Why is this?

Here is some news that reflects why this stock has been performing so well.

This article from globenewswire.com states that Paylocity acquired Blue Marble Payroll in September of 2021, a company with about 450 clients in 150 countries that specializes in helping US based companies manage employees outside the US.

This article from fool.com states that Paylocity has gained excellent traction with securing customers with less than 50 employees. Their sales strategy has done very well with large enterprise businesses but they are capitalizing on serving the SMB (Small and mid-sized business) market as well. Broadening their services offering has allowed them to scale.

This article from prnewswire.com states that Paylocity has placed a lot of effort on improving features such as community, video, surveys, and learning management. The community feature is essentially an internal messaging tool similar to Slack and this feature alone has experienced a 150% increase in usage over the last year. Video usage has tripled over the last year. Surveys are becoming more popular for obtaining feedback from both employees and customers. Companies are finding if they want to retain talent, they need to find out what employees like and don’t like about their jobs. This article also states that Paylocity was named the overall leader in seven HR payroll product categories for enterprise and 12 categories for SMBs. They were also awarded the Best Solution for Talent Development in the 2021 HR Tech Awards from Lighthouse Research and Advisory. 

This article from seekingalpha.com is titled “Why I was wrong about Paylocity.” The analyst that wrote this article states that he originally missed the mark when reviewing the Paylocity suite of products. He discovered that Paylocity offers a differentiated and higher quality product than other other HR tech companies such as ADP and Paychex. Paylocity has done a nice job quickly enhancing their products to adapt to changes in the market including disruption caused by Covid-19.

When investors talk about tech stocks, they typically refer to the flashy B2C (Business to Consumer) tech stocks such as Facebook (FB), Netflix (NFLX), and Uber (UBER). B2C stocks can draw a lot of hype even if the financials are terrible. One segment of tech most investors don’t know about or understand is B2B (Business to Business) tech. These business models aren’t as popular and can be perceived as boring but this doesn’t mean they aren’t good investments. Here are a few reasons why I like Paylocity aside from the impressive financials. 

1) They serve enterprise customers. 

When it comes to enterprise SaaS, large corporations typically sign contracts that extend over years.  Usually between 3 – 10 years.  The annual cost can range between hundreds of thousands to millions of dollars per year for just one corporate customer. Overall, enterprise SaaS is highly profitable and scalable.

2) They are capitalizing on the SMB market.

Only serving enterprise customers is still a good strategy but the best in class B2B SaaS businesses figure out ways to market and sell their product offerings to the small and mid-sized business segment and Paylocity has mastered this. Having tens of thousands of customers paying five to six figures a year is an excellent revenue model.

3) They are essential. 

On Seeking Alpha I stumbled upon a group of investors arguing over the point in times when you should enter and exit this stock. What these inexperienced investors have failed to do is look past the numbers and look at the business. If they set aside their over-engineered excel sheets for a moment, they might realize that as long as companies have employees, they will need HR tech to run the business. In other words, companies like Paylocity are absolutely essential. Managing a workforce without HR tech would be catastrophic. Without HR tech, business would run less efficiently and become susceptible to legal and compliance issues. 

 

Here is how Paylocity stacks up against the competition.

Paylocity (PCTY)

Summary:  On Sale

Score:  16/20

MOS:  80%

Share Price:  $291

Sticker Price:  $1,463

 

Paycom Software (PAYC)

Summary:  On Sale

Score:  16/20

MOS:  54%

Share Price:  $518

Sticker Price:  $1,123

 

Automatic Data Processing (ADP)

Summary:  Watch

Score:  10/20

MOS:  19%

Share Price:  $213

Sticker Price:  $265

 

Paychex (PAYX)

Summary:  Watch

Score:  11/20

MOS:  1%

Share Price:  $121

Sticker Price:  $123

 

Workday (WDAY)

Summary:  Watch

Score:  11/20

MOS:  1%

Share Price:  $277

Sticker Price:  $280

 

Now let’s take a look at the 4 M’s. A wise investor should always look past the numbers and look at the business.

MOS: A score of 16/20 is great. When you take a closer look at the why within Tykr you can see the ROIC is 5/6 , the EPS growth is 3/3, Cash growth is 3/3, Equity growth is 2/3 , and Sales growth is 2/3 . It’s also important to note the overall score has increased from 11/20 to 16/20 over the last year. This shows the financials are not only strong but they’re moving in the right direction.

Meaning: As mentioned earlier, HR tech is essential. Will HR tech be around in the next 10 years? As long as companies have employees, that’s an obvious yes.

Moat: There are a lot of competitors in this space but Paylocity’s financials are the best when lined up against the competition. As long as Paylocity continues to place a high priority on product development and customer service, they will stand out as one of the market leaders.

Management: Steven Beauchamp worked at ADP from 1995 through 1998. He then worked at Payroll Central from 1999 to 2001. He moved over to Advantage Payroll Services in 2001 which was acquired by Paychex in 2002. He worked as VP of Product Management at Paychex from 2002 – 2007. He joined Paylocity in 2007 as CEO and has been serving in that role for 14 years. Overall, he has over 20 years of HR tech experience. 

 

Now let’s take a look at the financials. A wise investor should be able to read the income statement, cash flow statement, and balance sheet and within 60 seconds have a pretty good idea of how the business is performing.

Revenue (Found on the Income Statement)

2018:  $377M

2019:  $467M

2020:  $561M

2021:  $635M

Revenue is increasing consistently which is a great sign.

 

Net Income (Found on the Income Statement)

2018:  $38M

2019:  $53M

2020:  $64M

2021:  $70M

Net Income is increasing consistently which is a great sign.

 

EPS (Found on the Income Statement)

2018:  .74

2019:  1.02

2020:  1.20

2021:  1.30

EPS increased consistently which is a great sign.

 

Free Cash Flow (Found on the Cash Flow Statement)

2018:  $60M

2019:  $83M

2020:  $70M

2021:  $86M

Free Cash Flow slightly dropped in 2020 but it bounced back in 2021. This is another great sign.

 

Total Assets (Found on the Balance Sheet)

2018:  $1.5B

2019:  $1.8B

2020:  $1.9B

2021:  $2.4B

Total Assets have increased consistently which is a great sign.

 

Total Liabilities (Found on the Balance Sheet)

2018:  $1.2B

2019:  $1.4B

2020:  $1.5B

2021:  $1.9B

Total Liabilities have increased which is okay. The large component of liabilities includes company payroll. As companies hire more people, the liabilities can increase.

 

Total Debt (Found on the Balance Sheet)

2018:  $2.1M

2019:  $1.4M

2020:  $134M

2021:  $74M

Total Debt increased significantly in 2020 but has declined in 2021 which is a good sign. A large component of debt can include bank loans. As companies grow quickly, they need more cash to manage payroll. This may be a reason why the debts increased in 2020.

 

Total Equity (Found on the Balance Sheet)

2018:  $212M

2019:  $307M

2020:  $392M

2021:  $476M

Total Equity has increased consistently. This is a great sign.

 

Paylocity has proven to stand out above the competition. The financials look great with a score of 16/20 and a MOS of 80%. With the meaning, we know HR tech will be around over the next 10 years. With the moat, there are a lot of competitors but Paylocity’s emphasis on product and customer service is helping this company stand apart. With management, Beauchamp has proven to be an excellent leader for this company over the last 14 years. If you’re looking for a boring yet essential tech stock to add to your portfolio, this stock is worth a look.

The Summary, Score, and MOS of this stock may have changed since the posting of this review. Please login to Tykr to see up-to-date information.