Automatic Data Processing, Inc. (ADP): A Bull Case Theory

We came across a bullish thesis on Automatic Data Processing, Inc. on Business Model Mastery’s Substack by The Antifragile Investor. In this article, we will summarize the bulls’ thesis on ADP. Automatic Data Processing, Inc.’s share was trading at $257.07 as of January 13th. ADP’s trailing and forward P/E were 25.94 and 24.04 respectively according to Yahoo Finance.

ADP is positioned as a high quality, mission critical services company built around payroll, human capital management, and compliance, with a business model defined by recurring revenue, scale, and deep customer entrenchment. The core of ADP’s earnings power comes from Employer Services, where clients pay recurring fees for payroll processing, tax filing, and essential HR functions that must operate flawlessly every pay cycle.

This “must work” nature is reflected in a 92.1 % revenue retention rate, showing that customers rarely leave once onboarded. A second, often misunderstood profit driver is interest income earned on client funds. Employers send payroll cash to ADP before it is distributed to employees and governments, allowing ADP to earn interest on roughly $31 billion of held funds, generating about $1.2 billion of high margin income in fiscal 2025.

ADP also operates a co employment model through its PEO segment, where reported revenue appears inflated because benefits costs flow through the company, while true economic revenue and margins are lower but still meaningful. Geographically, the business is global but remains predominantly U.S. based, with international payroll adding complexity that strengthens customer reliance and creates long term margin expansion opportunities as scale builds.

Financially, ADP converts earnings to cash efficiently, producing nearly $4.9 billion in operating cash flow on $4.1 billion of net income with minimal capital spending, reinforcing the durability of the model. The company’s moat is anchored in switching costs, regulatory complexity, trust built from handling massive client fund balances, and a broad distribution network that consistently generates new client wins.

While margins can fluctuate modestly due to investment in sales, product, and implementation, these pressures reflect reinvestment to defend a deeply embedded and resilient franchise rather than structural weakness.

Previously, we covered a bullish thesis on ADP by David in November 2024, which highlighted the company’s mission critical payroll platform, float driven interest income, and defensive cash generation. The company’s stock price has depreciated by approximately 15.62% since our coverage. This is because valuation multiples compressed despite stable fundamentals. This is because recurring revenue, retention, and cash flow durability remain intact. The Antifragile Investor shares a similar view but emphasizes business quality, segment economics, and moat durability.

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Disclosure: None.