Wait for More Data Before Buying Paycom Software

Investors are bullish on Paycom Software (NYSE:PAYC) ever since the company posted an earnings report that beat on the top and bottom lines. And last week’s jobs report was like adding gasoline to a fire. At the time of this writing, PAYC stock has almost doubled from its low of $165.01 on April 3.

Wait for More Data Before Buying Paycom Software
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But with an unemployment that is still over 13% (or is it really that low?), the company still faces pressure on revenue from its existing customers. And there is still an unknown regarding how fast the recovery will be.

The reality is that investors seem to be buying PAYC stock because the company should be able to generate more revenue as employers add to their payrolls. But the opposite is true now. And that’s one reason why I think investors need to be very clear about the real story about the unemployment numbers and how they affect Paycom’s revenue.

The Unemployment Numbers May Not Be What They Seem

Well, that didn’t last long. On June 5, 2020 the stock market rejoiced at the May jobs report that showed the private sector added 2.5 million jobs in May. After the depressing, but not unexpected number that was reported in April, this looked to be the shot in the arm that the economy needed.

But Forbes is reporting that the U.S. Department of Labor’s Bureau of Labor Statistics (BLS) admitted to miscounting 4.9 million people as employed even though they were unemployed. To make a long story short, with those workers correctly classified, the April figure would have been nearly 20% (19.5%) instead of the 14.7% recorded. And that means that yesterday’s trimming of the unemployment percentage to 13.3% would have been 16.3%.

There are some fundamentally disturbing questions that arise from this admission, particularly during an election year. But to keep the focus on Paycom, the company’s lost revenue loosely tracks the unemployment numbers. So, let’s say just 10% of those uncounted workers worked in companies that use Paycom’s service. How much revenue does the company lose?

It’s Unclear How Much Paycom Is Really Being Affected

This takes me to my second point about the current status of PAYC stock. Once a company is signed up, Paycom takes a financial hit when an existing customer begins to layoff or furlough employees. But when pressed on their most recent earnings call, the company wouldn’t provide specific statistics. Paycom president and chief executive officer Chad Richison would only say the spike in unemployment has an effect on its current client revenue.

I’m not calling foul on Richison or Paycom. The situation may be a bit too fluid at the moment. But investors would prefer hard numbers over ambiguous guidance.

The Company Does Not Disclose Pricing

When I looked on the company’s website, it did not disclose what its “base fee” was. According to Richison, that fee is paid by every company no matter if they have one employee or 100 employees. But what’s less clear is whether the base fee changes based on the size of the company.

According to a review site I found, Paycom appears to be on the luxury side of the payroll spectrum. The company gets high ratings for personalized service. That’s a nice touch that could easily explain the higher fee. But it’s not a reason to not buy PAYC stock. The company has had reports of the app being difficult to use.

Why It’s Okay to Wait on PAYC Stock

Throughout this global pandemic, we’ve come to understand the importance of knowing both the numerator and the denominator when it comes to interpreting data.

Right now, Paycom’s denominator (the total unemployment picture) may not be as clear as first reported. And that means that the company may not be getting a clear picture of their revenue loss (the numerator).

I like the overall trend of the stock. Paycom can still get business even when businesses are letting employees go. So even as they’re losing revenue, they could potentially be seeing a net gain. And Paycom’s value proposition is evident in the ability to reduce head count.

In fact, Richison said that throughout April, the company was seeing the same level of booked sales as they were before the pandemic.

All of which to say there’s the potential for a lot of good and a lot of bad. And with a stock that is already at record highs, now may be a good time to wait for some hard numbers.

Chris Markoch is a freelance financial copywriter who has been covering the market for over five years. He has been writing for InvestorPlace since 2019. As of this writing, Chris Markoch did not hold a position in any of the aforementioned securities.

Article printed from InvestorPlace Media, https://investorplace.com/2020/06/payc-stock-needs-clear-numbers/.

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