Kerrisdale Capital, an investment management company, released its investor letter for July. A copy of the same can be downloaded here. Kerrisdale Capital mentioned that, with a market capitalization of over $10 million, Paycom Software, Inc. (NYSE:PAYC) is overvalued compared to its peers. You can check the top 5 holdings of the fund to know its best picks in 2022.
In the letter, Kerrisdale Capital discussed Paycom Software, Inc. (NYSE:PAYC) stock. Headquartered in Oklahoma City, Oklahoma, Paycom Software, Inc. (NYSE:PAYC) provides cloud-based software solutions for payroll and HR management. On August 24, 2022, Paycom Software, Inc. (NYSE:PAYC) stock closed at $371.45 per share. One-month return of Paycom Software, Inc. (NYSE:PAYC) was 13.74% and its shares lost 22.80% of their value over the last 52 weeks. Paycom Software, Inc. (NYSE:PAYC) has a capitalization of $22.297 billion.
Here is what Kerrisdale Capital said about Paycom Software, Inc. (NYSE:PAYC) in the July investor letter:
“We are short shares of Paycom Software, Inc. (NYSE:PAYC), a $19 billion SaaS-based payroll services company that has been one of the best performing large capitalization software stocks since it went public in 2014. Even after the market turmoil of this year, Paycom trades at more than 70x the consensus estimate for this year’s free cash flow, a testament to the fact that, while unprofitable tech companies and temporary pandemic winners have been justly punished in the markets, there’s still plenty of froth left in allegedly higher quality fare. Paycom’s valuation, in particular, doesn’t come close to reflecting the near term headwinds of slowing employment growth, meaningful TAM saturation, and increasing competitive intensity.
Paycom’s steady and robust growth over the past decade has come by way of taking market share from payroll industry behemoths ADP and Paychex. Paycom has been accompanied in this quest by high-tech peers Paylocity (PCTY) and closely held BambooHR, and has been buttressed by secular job growth trends in the US small and medium business sector. But Paycom is no longer a $100 million annual revenue upstart, and neither are its peers. At $1.4 billion of run-rate recurring revenue, the company is a scaled business, and combined with Paylocity, Bamboo, and other dynamic tech companies in the sector, the group’s share of the SME payroll market is north of 40%. That’s a lot more than the blue-sky implications of Paycom’s 5% market share claim, and it means that further market share gains will be a lot more difficult going forward.
At the same time, ADP is fighting back, increasing its customer retention rate and growing its employee rolls. Rippling and Gusto, two rapidly growing startups in the space, have also recently raised capital at $10-billion-plus valuations, and are actively fighting for market share. All this means that the competition faced by Paycom is about to get a lot tougher. If that weren’t enough, US employment growth looks to be decelerating at a fairly significant clip, which means that all the payroll players will be fighting in a smaller field. For a SaaS company with an astronomical valuation like Paycom’s, price cutting is probably not something investors are accustomed to thinking about, but they might soon have to…” (Click here to read the full text)
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Paycom Software, Inc. (NYSE:PAYC) is in not on our list of 30 Most Popular Stocks Among Hedge Funds. As per our database, 43 hedge fund portfolios held Paycom Software, Inc. (NYSE:PAYC) at the end of the first quarter which was 49 in the previous quarter.
We discussed Paycom Software, Inc. (NYSE:PAYC) in another article and shared Polen Capital’s views on the company. In addition, please check out our hedge fund investor letters Q2 2022 page for more investor letters from hedge funds and other leading investors.
Disclosure: None. This article is originally published at Insider Monkey.
