This Tech Gem Has Dropped Too Far
PREFACE
The standard company summary for Paycom Software, Inc (PAYC) will feel boring. But what the company actually does and the incredible success it is realizing are not only not boring, they have created a remarkable opportunity.
THEMES: CLOUD
The critical elements and themes we are focusing on with PAYC are cloud based computing with software as a service (SaaS) revenue model. Here is the forecasted growth of cloud computing revenue through 2018 via Statista.
We're looking at a market growing from $80 billion in 2015 to $143 billion in 2018, or a 78% increase.
AMAZON, MICROSOFT AND SALESFORCE
The cloud computing space on a large scale is dominated first by Amazon (AMZN) and its Amazon Web Services (AWS). Close behind Amazon is Microsoft's (MSFT) enterpirse cloud computing service, Azure. But, perhaps the most interesting of all mega-cap cloud computing companies is Salesforce (CRM).
Each of these companies have CML Pro research dossiers surrounding the opportunities they are pursuing and cloud computing is a huge part of the investment thesis.
THEMES: SaaS
With PAYC we're also looking at the critical phrase "recurring revenue model," which comes from SaaS. Here's how that market is forecasted to grow for enterprise resource planning (ERP) software:
Just in the ERP realm, we're looking at revenue growth from 2015 to 2016 hitting 19%, and in the longer-term trend, a 276% rise over six-years.
SaaS is another place where Microsoft (MSFT) is hyper-focused. In fact, as the company's earnings have gone into recession, the stock has exploded 40% higher simply becasue it is transforming from a one-time software sale business into a recurring, software as a service, model.
The same can be said of Amazon (AMZN) and its Prime Service, which is a recurring annual fee. Recurring revenue has become the catchphrase in technology that leads to higher valuations.
PAYCOM
Here's how the company introduces itself:
Once upon a time there were separate systems for dozens of functions and HR had to enter the same data over and over again into each system.
This flawed approach breeds errors and inconsistencies leading to audits, compliance failures and in the worst case scenarios, lawsuits.
Enter Paycom with its cloud based system and its "infinite scalability."
Now everything goes into one place. But, it's not just one system or one solution, it's one database: the brain that the powers all functions.
The company calls this its "game changer." A technology for HR that engages every level of employee -- in particular, the company claims it be the most robust offering for executives.
THE GUTS
PAYC's revenue is booming, up 50% year-over-year and 108% over the last two-years. Here's the all-time revenue (TTM) chart in the blue bars and net income (TTM) in the orange line.
We can also see that net income (after tax earnings) has grown from $1 million two-years ago, to $6 million one-year ago, to now $21 million in the trailing-twelve-months.
EARNINGS
In the latest earnings report that was released on February 9th, 2016, we learned that the company delivered $65.1 million in revenue versus expectations of $61 million. As ZACKS put it:
revenues were impacted positively by a 47% increase in recurring revenues and a whopping 77.9% increase in implementation and other revenues on a year-over-year basis.
Source: ZACKS
The company's press release revealed stunning news: Annualized New Recurring Revenue ("ANRR") saw 97% growth. There's that phrase again, "recurring revenue."
Even better, as revenue is rising, gross margins are also rising.
Trends matter and PAYC not only reported an all-time high in revenue and earnings, it also reported an all-time high in gross margin % (that green bar represents the high).
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A NEW CATALYST AND COMPETITION
The Affordabale Care Act (ACA) has added a big burden to many companies. Paycom's ACA dashboard application is gaining adoption and should be a momentum builder for the company's long-term growth.
If you do any kind of research on PAYC, one of the first things you'll find is a mention of competition. Companies like PCTY, INTU, TNET, ADP and PAYX are all in similar businesses and all going after a booming segment. This means we need an investment thesis that goes beyond just financial data. It turns out, we have such a thesis.
THE 'NON FINANCIAL' TREND
When looking at small(ish) cap tech companies, we need to go further than just the themes and the business fundamentals and reach for as much 'non financial' information as we can find that's relevant. For PAYC, we didn't have to look very hard.
The details are available in the CML Pro research dossier.
STOCK PRICE
Even though PAYC has a history of beating earnings and then popping on that news, the stock has been hammered along with the rest of technology. Here's the rather ugly two-year stock chart:
We can see that remarkable tumble from over $46 to now just above $27. Interestingly, the stock has gapped up on earnings results, which means it continues to impress and beat forecasts.
STOCK OWNERSHIP
Between insider holdings and institutional ownership, we're looking at 85% of the float. But, there is an immense short interest in this stock, hitting nearly 30% of the total float and it's growing. Here's the trend from NASDAQ:
NOW WHAT
Analyst coverage for the stock is rather bullish. The median target is $40, fully 50% higher than the current stock price (Data provided by Thomson/First Call).
WHY THIS MATTERS
If any of this information feels like a surprise, in many ways it is. Thematic investing is the key, in fact, here are just two of the other trends that will radically affect the future that we are well ahead of:
The Internet of Things (IoT) market will be measured in trillions of dollars as of next year. CML Pro has named the top three companies that will benefit on our 'Top Picks' list.
CML Pro research sits side-by-side with research from Goldman Sachs, Morgan Stanley and Merrill Lynch on professional terminals and while institutional research costs tens of thousands of dollars a year, CML Pro was created for the anti-institution. Here's the tremendous opportunity in cybersecurity.
Market correction or not, recession or not, the growth in this area is a near certainty, even if projections come down, this is happening. CML Pro has named the single best cybersecurity stock to benefit from this theme. It's also on our 'Top Picks' list.
These are just two of the themes we have identified and this is just one of the fantastic reports CML Pro members get along with all the visual tools, the precious few thematic top picks for 2016, research dossiers and alerts. For a limited time we are offering CML Pro at a 90% discount for $10/mo. with a lifetime guaranteed rate and no contract. Join Us: Get the most advanced premium research delivered to your inbox along with access to visual tools and data that until now has only been made available to the top 1%.
Thanks for reading, friends.
