Automatic Data Processing (NASDAQ:ADP) reported fiscal fourth-quarter results on Wednesday. Adjusted earnings per share and revenue beat Wall Street estimates. The stock is down on Thursday. Let’s analyze whether it’s a buy-the-dip opportunity for long-term investors.
ADP runs payroll and HR software for businesses. Companies pay ADP to handle paychecks, tax withholding, benefits, and compliance, so they don’t have to build that system themselves. ADP also holds client money for a few days before paying it out, and earns interest on it in the meantime. That’s a big chunk of its profit. The company splits its business into two segments: Employer Services, which covers payroll and HR for companies of all sizes, and PEO, where ADP acts as a co-employer and handles HR work for small and mid-size businesses directly.
Fiscal Q4
Employer Services margin got better, up 90 basis points, helped by AI tools the company rolled into its sales and service teams. PEO margin got worse, down 100 basis points, because more of its revenue now comes from low-margin pass-through costs and because workers’ comp expenses rose.
For the full year, revenue grew 7% and adjusted EPS grew about 11%. Management credited strong client retention and steady new business bookings. ADP Assist, the company’s AI assistant tool for HR tasks, logged over 3 million active users during the year.
Shares jumped as much as 5% the morning results came out. The rally didn’t last. A day later, ADP is down more than 4%.
Guidance. ADP expects 5%-6% revenue growth for fiscal 2027, down from 7% in fiscal 2026. It expects 9%-11% adjusted EPS growth, roughly flat to slightly below fiscal 2026’s 11% adjusted EPS growth for the full year. It also expects client fund balances to grow just 3%-4%, down from 7% in fiscal 2026, as wage growth cools off.
The stock already ran up a lot. ADP now trades near 22-23 times forward earnings, well above where it sat back in April at its 52-week low. That’s still below its own 5-year average multiple, so it’s not expensive by its own history. But it’s no longer the clear bargain.
The AI Factor
The AI story is turning in ADP’s favor too. For a while, investors worried AI would let smaller, nimbler competitors undercut ADP by handling payroll complexity more cheaply. Instead, ADP looks like it’s using AI to cut its own costs and boost margins. Its internal AI platform, the Zone, reportedly reached 48% deployment across ADP’s service team, beating its own year-end target. ADP Assist logged 12 million user conversations and flagged 45,000 compliance issues during the year.
The bear case and risks
Growth is slowing, not accelerating. Revenue growth guidance of 5%-6% for next year is a step down from 7% this year. If AI adoption doesn’t offset that slowdown, the stock’s premium valuation gets harder to justify.
A softer labor market hits ADP directly. ADP’s business depends on hiring activity, new business formation, and payroll size. If unemployment rises or hiring slows, new client bookings, client fund balances, and interest income all take a hit at the same time.
Mairs & Power Balanced Fund stated the following regarding Automatic Data Processing, Inc. (NASDAQ:ADP) in its Q1 2026 investor letter:
“Offsetting this, fears around AI impacting software pricing and jobs into the future negatively affected Automatic Data Processing, Inc. (NASDAQ:ADP). We reassessed our position on ADP and continue to be confident in the company’s position going forward.”
While we acknowledge the risk and potential of ADP as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns and doing so within a shorter time frame. If you are looking for an AI stock that is more promising than ADP and that has 10,000% upside potential, check out our report about the cheapest AI stock.
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