Shares of Paycom (NYSE:PAYC) are in focus following the release of a short report from Kerrisdale Capital. The hedge fund also tweeted out a thread on Twitter (NYSE:TWTR) to support its position. On Aug. 1, Kerrisdale will host a Twitter Spaces with financial influencer @gurgavin to discuss its PAYC stock short.
Paycom has confirmed that it will report Q2 earnings on Aug. 2. However, Kerrisdale notes that the report could act as a negative catalyst. The firm points out that other negative catalysts to potentially affect PAYC include slowing nonfarm payroll reports and rising unemployment.
Kerrisdale believes Paycom operates an “ok biz,” but the company’s valuation is what inspired Kerrisdale to publish the short report. Let’s get into the details.
PAYC Stock: Kerrisdale Releases Short Report
The short seller notes that PAYC currently trades at 70x the consensus estimate for this year’s free cash flow (FCF). While other tech companies and pandemic beneficiaries have seen their valuations slashed, Kerrisdale believes that there is still “plenty of froth left in allegedly higher quality fare.” On top of that, the valuation of Paycom does not reflect potential headwinds in the near term, such as total addressable market (TAM) saturation, increasing competition and a slowing job market.
Kerrisdale characterizes Paycom as a mature business that already has a decent chunk of the small and mid-size enterprise (SME) payroll market. As a result, further market share penetration may prove difficult and revenue growth and margins may be hampered. The hedge fund also accuses Paycom of using “aggressive accounting to inflate its EBITDA” by “playing games with deferred contract costs and capitalized R&D to hide book expenses.”
Meanwhile, the company’s competitors are upping their game. Automatic Data Processing (NASDAQ:ADP), a human capital management (HCM) company, has increased its customer retention rate and employee payrolls. Furthermore, two startups in the same space have raised funds at valuations over $10 billion and are actively fighting to take market share.
Finally, Kerrisdale questions the company’s “cutthroat” corporate culture. In the past, Paycom’s sales tactics have led to regulatory settlements, high sales representative turnover and poor customer service.
The hedge fund has disclosed a short position in PAYC with a base case price target of $185.
On the date of publication, Eddie Pan did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
