Paycom software (PAYC -0.14%) is a pioneer of web-based human resources (HR) and payroll software and one of them Newsweekis one of the most trusted companies in America. It is a winner of the Business Intelligence Group’s 2023 BIG Innovation Awards. But it’s a big loser for investors this year.
In fact, the stock has been a loser for a long time. Paycom shares fell 8% in 2021 and 25% in 2022. The stock is still in the red, down more than 40% so far in 2023. But could Paycom still be a millionaire-making stock?
What would be necessary for that
There’s an old joke that the easiest way to make $1 million is to start with $2 million. Any stock, including Paycom, could make you a millionaire if you start with a large enough upfront investment.
But let’s say instead that you initially invested $10,000 in Paycom stock. To turn it into a cool $1 million, your investment would have to produce a 100x return. The chances of achieving such a return over a short period of time are slim to none.
But what if you had a time horizon of 25 years? Analysis of the numbers shows that Paycom should achieve an average annual growth rate of just under 20.3%. Very few companies can achieve this goal – but it is not impossible.
For example, Nvidia has turned an initial investment of $10,000 into nearly $5.7 million over the last 25 years. The same investment in Tesla When it went public in 2010, it would be worth nearly $1.5 million today.
Can Paycom be a millionaire maker?
Paycom is not Nvidia or Tesla. The software company is celebrating its 25th birthday this year. An initial investment of $10,000 in 1998 would have grown to about $113,000 today.
It may be difficult for the company to generate higher returns in the future. Paycom’s revenue is expected to grow about 22% annually in 2023. However, the revenue growth rate is expected to decline to 10-12% next year.
At first glance, such a deterioration in revenue growth would seem to kill Paycom’s chances of becoming a millionaire. However, it’s important to understand why the company’s revenue growth is slowing.
Paycom’s Beti do-it-yourself payroll software for employees eliminates errors, corrections and unscheduled payrolls and bills the company for such tasks. Beti is so good that it is affecting Paycom’s sales. In the long run, however, the software could be so attractive to employers using competing products that it accelerates Paycom’s revenue growth.
Still, I don’t think Paycom will be a millionaire stock under the parameters we’ve set. Allied Market Research predicts that the global HR and payroll software market will be nearly $56 billion by 2031. Even if Paycom captured 100% of this market (which is highly unrealistic), it would require a sky-high price-to-sales ratio of over 19x to turn $10,000 into $1 million.
The more important question
Whether Paycom will be a millionaire maker or not is not the most important question for investors. Instead, they should ask themselves, “Will I make money long-term with Paycom stock?” I think the answer to that question is a resounding “yes.”
Paycom’s valuation is the most attractive in a long time. The price-earnings-growth ratio (PEG) is 1.17 – not bad at all. I suspect that Beti will ultimately significantly increase the company’s sales. And I expect this beaten-down stock won’t be a loser for much longer.
Keith Speights has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Nvidia, Paycom Software, and Tesla. The Motley Fool has a disclosure policy.