Paycom Software: A Promising Tech Stock with Growth Potential

Paycom Software is a leading provider of cloud-based human capital management solutions, helping businesses manage the entire employee lifecycle through a single, automated platform. Known for its focus on self-service, automation, and strong client retention, Paycom has built a solid position in a competitive market. With growth opportunities in larger enterprises and international expansion, the question is: Does this HCM innovator belong in your portfolio?

This is not a financial advice. I am not a financial advisor and I only do these post in order to do my own analysis and elaborate about my decisions, especially for my copiers and followers. If you consider investing in any of the ideas I present, you should do your own research or contact a professional financial advisor, as all investing comes with a risk of losing money. You are also more than welcome to copy me. 

For full disclosure, I should mention that I do not own any shares in Paycom Software at the time of writing this analysis. If you would like to copy or view my portfolio, you can find instructions on how to do so here. If you want to purchase shares or fractional shares of Paycom Software, you can do so through eToro. eToro is a highly user-friendly platform that allows you to get started on investing with as little as $50.

The Business

Paycom Software is a leading provider of cloud-based human capital management solutions delivered through a Software-as-a-Service model. Founded in 1998 and headquartered in Oklahoma, the company offers a comprehensive end-to-end platform that supports the entire employee lifecycle - from recruitment to retirement. Its solution includes applications for payroll, time and labor management, HR administration, talent acquisition, and performance management, all built on a single codebase and housed in one database. This unified architecture eliminates the need for third-party integrations, reduces data inconsistencies, and improves compliance and reporting capabilities. Paycom’s competitive moat rests on four key pillars: a single-database platform built entirely in-house, deep automation and employee self-service capabilities, a high-touch client service model, and strong brand trust reinforced by industry recognition. The company primarily serves mid-sized businesses, typically ranging from 50 to 10.000 employees, and uses a direct sales model paired with dedicated service specialists. This high-touch approach contributes to strong client relationships and an annual revenue retention rate of 90% in both 2023 and 2024. With around 37.500 clients and no single customer accounting for more than 0,5% of revenue, Paycom benefits from a highly diversified client base. A core strength of the platform is its focus on automation and employee self-service. Tools like Beti allow employees to process their own payroll, while features such as Direct Data Exchange and Manager on-the-Go enable users to handle routine HR tasks and gain real-time insights. These capabilities help clients reduce administrative burden, boost employee engagement, and unlock measurable cost savings. Paycom also distinguishes itself through its commitment to organic growth and exclusive in-house development. By building all of its software internally, the company maintains full control over its technology, allowing for rapid innovation, tight integration, and a consistent user experience. Combined with a disciplined cost structure and ongoing product enhancements, this approach supports high operating margins and positions Paycom as one of the most efficient and scalable providers in the HCM industry.

Management

Chad Richison is the Founder, CEO, and Chairman of the Board of Paycom Software, a company he established in 1998. Under Chad Richison’s leadership, Paycom has evolved from a startup into one of the leading providers of cloud-based human capital management solutions in the United States. He is also the company’s largest shareholder, owning approximately 12% of outstanding shares, which strongly aligns his interests with those of long-term investors. Before founding Paycom, Chad Richison began his career in sales at both a national payroll and human resources provider and a regional payroll firm. These early experiences gave him firsthand insight into the limitations of legacy payroll systems and inspired his vision to build a more unified, employee-driven platform. Chad Richison holds a bachelor’s degree in mass communications–journalism from the University of Central Oklahoma. Throughout his tenure, Chad Richison has maintained a strong focus on innovation, automation, and product quality. Paycom’s single-database architecture and proprietary self-service features - including the industry-first Beti payroll solution - reflect his commitment to creating efficient, scalable software that empowers both employers and employees. His leadership has helped drive the company’s long track record of organic growth, high margins, and customer retention. In 2023, Paycom earned the Gallup Exceptional Workplace Award for the second consecutive year, underscoring a positive culture and high employee engagement. However, Chad Richison’s leadership was tested in 2024 when a leaked recording of an internal meeting attracted public scrutiny for its tone, leading to reputational damage. That same year, he appointed Chris Thomas as co-CEO, who departed after only a few months for personal reasons. Despite these setbacks, Chad Richison continues to enjoy strong employee approval, with a Comparably rating of 87/100, placing him in the top 5% of CEOs of similarly sized companies. Chad Richison is widely regarded as a visionary founder-CEO who has not only scaled Paycom into a major enterprise software company but has also maintained strategic consistency and product integrity by keeping development in-house. Given his alignment with shareholders, deep understanding of the business, and track record of value creation, I believe Chad Richison remains well-positioned to lead Paycom through its next chapter of growth.

The Numbers

The first number we will look into is the return on invested capital, also known as ROIC. We want to see a 10-year history, with all numbers exceeding 10% in each year. Paycom Software has consistently delivered a ROIC above 20% throughout the past decade. This strong performance is the result of an efficient business model and disciplined capital allocation. The company benefits from a single-database architecture, internally developed software, and a focus on automation and employee self-service - all of which support high profit margins and require relatively little capital to maintain. Together, these factors enable Paycom to generate substantial returns on the money it invests in the business. ROIC declined in 2020 and has not yet returned to its previous highs. The drop was primarily driven by the COVID-19 pandemic, which caused headcount reductions across Paycom’s client base. Since the company charges clients on a per-employee basis, this led to a temporary decline in recurring revenue. In the years following 2020, Paycom’s ROIC improved, but it still hasn’t reached pre-pandemic levels. Even so, Paycom’s ability to maintain a consistently high ROIC underscores the strength of its business fundamentals, including a scalable SaaS model, high client retention, and sound financial discipline. While external factors like economic downturns or tax changes can affect ROIC in the short term, the company’s operating efficiency and strategic focus position it well for continued long-term profitability.

The next numbers are the book value + dividend. In my old format this was known as the equity growth rate. It was the most important of the four growth rates I used to use in my analyses, which is why I will continue to use it moving forward. As you are used to see the numbers in percentage, I have decided to share both the numbers and the percentage growth year over year. To put it simply, equity is the part of the company that belongs to its shareholders – like the portion of a house you truly own after paying off part of the mortgage. Growing equity over time means the company is becoming more valuable for its owners. So, when we track book value plus dividends, we’re essentially looking at how much value is being built for shareholders year after year. Paycom Software is a textbook example, as it has increased its equity by more than 10% every year over the past decade. While management does not frequently highlight equity in their commentary, their actions—such as consistently reinvesting profits into the business and maintaining a strong balance sheet—show a clear commitment to building long-term shareholder value. This steady growth in equity has been made possible by the company’s consistent profitability, capital-light business model, and disciplined financial management. Given Paycom’s solid business fundamentals and long runway for growth, it is very likely that this pattern of value creation will continue in the years ahead.

Finally, we will analyze the free cash flow. Free cash flow, in short, refers to the cash that a company generates after covering its operating expenses and capital expenditures. I use levered free cash flow margin because I believe that margins provide a better understanding of the numbers. Free cash flow yield refers to the amount of free cash flow per share that a company is expected to generate in relation to its market value per share. It is not surprising that Paycom Software has delivered positive free cash flow every year for the past decade. Even more encouraging, the company has managed to grow its free cash flow every single year during that period. In 2024, Paycom achieved the third-highest levered free cash flow margin among its peers, continuing a long-standing track record of strong cash generation. This consistent growth in free cash flow, along with its high margins, is a direct result of the company’s efficient operating model - centered around its single-database architecture, internally developed software, and emphasis on automation and employee self-service. Given these fundamentals, free cash flow is expected to continue growing in the years ahead. The company allocates its free cash flow toward both share repurchases and dividends, meaning investors can reasonably expect continued buybacks and dividend growth as cash generation expands. The free cash flow yield is currently at its highest level in the past decade, which suggests the stock is trading at a more attractive valuation than in recent years. That said, a yield of 2,7% still reflects a premium valuation. We will explore this in more detail when we revisit valuation later in the analysis.

Debt

Another important aspect to investigate is the level of debt - specifically, whether a business has manageable debt that could be paid off within three years. This is assessed by dividing total long-term debt by earnings. In the case of Paycom Software, the company has no long-term debt at all. Debt is therefore not a concern, and given Paycom’s strong balance sheet—including $402 million in cash and cash equivalents - it is unlikely to become one in the foreseeable future.

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Risks

Competition is a risk for Paycom. The market for human capital management (HCM) solutions is highly competitive, rapidly evolving, and fragmented. Paycom competes with a broad range of providers - from small regional firms to global tech giants like ADP, Workday, Oracle, SAP, Paychex, Dayforce (Ceridian), and Paylocity. Many of these competitors have deeper financial resources, broader client bases, global reach, and the ability to bundle multiple services into integrated offerings. They also benefit from extensive partnerships with consultants, distributors, and other software vendors - an area where Paycom has less exposure. While Paycom’s single-database platform is a major strength - it keeps everything in one place and reduces errors - it can also be a drawback for some clients. Businesses that want to mix and match software from different providers, or connect their HR systems to other tools they already use, may find Paycom less flexible than competitors. Some rival platforms are built to be more modular and easier to integrate with outside software, which is especially attractive to larger companies with complex systems. In addition, the rise of simplified, low-cost HCM solutions - such as white-label platforms and embedded payroll features - has lowered the barrier to entry for new competitors. This is contributing to growing pricing pressure, especially among smaller businesses where cost is often the main decision factor. Larger competitors can also respond more aggressively, whether through acquisitions, faster product development, or more favorable contract terms. This has already led to some pressure on Paycom’s billing practices and pricing. If Paycom is forced to lower prices or change its terms to remain competitive, it could impact profit margins over time.

Data security is a risk for Paycom. As a provider of cloud-based human capital management software, Paycom collects, stores, and transmits highly sensitive data for its clients - including personal identifying information, financial and payroll details, and employment records. This makes Paycom a prime target for cyber-attacks. Threats such as phishing, malware, distributed denial-of-service (DDoS) attacks, and other security breaches could result in unauthorized access to client or employee data. Even though Paycom implements background checks and access controls, the risk remains that a malicious actor - either external or internal - could compromise their systems. Importantly, the risk is not limited to Paycom's own infrastructure. The company relies on third-party vendors for certain aspects of data processing and transaction management, and some of these vendors have previously been breached. In at least one case, this resulted in unauthorized access to client data, employee records, and even some company information. These incidents illustrate how even indirect vulnerabilities - through partners or vendors - can expose Paycom to operational, legal, and reputational risks. Another factor compounding the risk is the increasing sophistication of cyber threats globally. Many attacks are now orchestrated by organized groups or state-backed actors, and the tools they use evolve constantly. This makes it difficult for any organization, including Paycom, to fully anticipate and prevent every possible breach. A successful attack or data breach could significantly harm Paycom’s reputation, lead existing clients to abandon the platform, deter new clients from signing on, and result in regulatory penalties or legal liabilities. Given the critical and confidential nature of the data Paycom handles, even the perception of weak security could impact its business performance and long-term client trust.

Government regulation is a risk for Paycom. As a provider of payroll and HR software, Paycom operates in a highly regulated environment that spans tax laws, labor policies, financial services rules, and consumer privacy legislation. These regulations are not only complex and constantly evolving - they also differ across jurisdictions, both within the U.S. and internationally. This creates ongoing compliance challenges that could materially impact the business. One important regulatory risk for Paycom involves payroll taxes. Because the company handles payroll and tax payments on behalf of its clients, even small mistakes in calculating or sending these payments could cause legal or financial problems for those clients - and damage Paycom’s reputation. In addition, employment laws change frequently, including rules around overtime pay, benefits, and healthcare requirements. Paycom’s software needs to keep up with these changes to help clients stay compliant. If it doesn’t, clients could be penalized and blame Paycom, which could hurt its reputation or lead to financial loss. Another area of concern is tax compliance. States are becoming more aggressive in enforcing sales and use taxes. As Paycom continues to expand into new regions, it could face unexpected tax bills, penalties, or audits. If new taxes are added specifically for online services like Paycom’s, it could make the company’s offerings more expensive for clients, potentially reducing demand. Finally, there is increasing scrutiny around the use of artificial intelligence and automation - especially in areas like hiring and HR decisions. New laws could require Paycom to change how its software works, such as explaining how automated decisions are made or giving users the option to bypass AI tools. This could slow down innovation, increase development costs, or limit what the software can do.

Reasons to invest

Paycom’s software portfolio - particularly Beti and GONE - is a key reason to invest in the company. These two tools reflect Paycom’s strategic push toward full automation across human capital management (HCM), driving measurable ROI for clients and deepening competitive differentiation in a crowded market. Beti is the industry’s first solution that empowers employees to run their own payroll. Instead of HR teams spending hours checking timesheets, correcting errors, and chasing approvals, Beti shifts this responsibility directly to employees - while the system automatically identifies and flags issues before payroll is submitted. The result is greater accuracy, enhanced trust from employees, and dramatically reduced payroll processing time. Independent studies, including one by Forrester, show that Beti can reduce payroll error correction time by 85% and cut total labor for payroll processing by 90%. This frees up HR teams to focus on strategic work instead of manual tasks, improving both efficiency and employee engagement. Management also reports that Beti improves client retention - because once fully adopted, it becomes an integral part of the client’s day-to-day operations. GONE, Paycom’s time-off automation tool, delivers similar benefits in the area of labor management. Companies using GONE can automate up to 100% of time-off request decisions, removing friction between employees, managers, and HR teams. A Forrester study found that organizations using GONE saved nearly five weeks of unproductive time annually across HR, finance, and accounting functions. For many businesses, time-off decisions can add up to 20–30 interactions per employee per year - GONE eliminates these bottlenecks with real-time, rules-based automation. The tool enhances both operational efficiency and employee satisfaction, and has already received industry recognition for innovation. Together, Beti and GONE represent Paycom’s broader strategy: eliminate repetitive, non-revenue-generating tasks through automation, and in doing so, deliver exceptional client ROI.

Winning more customers is a key reason to invest in Paycom, as the company continues to expand its reach, gain market share, and drive organic growth. This sales momentum reflects not just near-term demand, but also the effectiveness of Paycom’s go-to-market strategy, sales training, and product differentiation. While the company has reduced its focus on smaller clients - a shift management describes as trading “40 pennies for $2 bills,” meaning fewer clients but with much higher revenue per client - it is seeing strong traction in the mid-sized and larger enterprise segments. For example, client growth among companies with over 1.000 employees rose 12%, signaling a successful move upmarket. This shift not only boosts revenue per client, but also strengthens retention, as larger organizations tend to have longer contracts and deeper integration with Paycom’s platform. To support this growth, Paycom has opened three new sales offices, each staffed with pre-trained, ready-to-sell teams. Although these offices will contribute only modestly in the near term, they are expected to generate meaningful revenue starting in 2026 and reach full productivity by 2027. Management noted that these new locations are ramping more efficiently than in the past, thanks to improvements in training and sales team readiness - setting the stage for stronger early results. Importantly, Paycom still commands only about 5% of its total addressable market, leaving significant room for continued expansion. With a highly automated platform that resonates strongly with clients, a scalable and increasingly effective sales force, and high customer satisfaction, Paycom is well-positioned to continue gaining share. Because its pricing is based on the number of employees and pay cycles, every new client adds predictable, recurring revenue - making client acquisition a powerful long-term growth driver.

International expansion is an emerging but important reason to invest in Paycom, as the company begins to take its proven U.S.-focused model into new markets. Historically, Paycom has generated nearly all of its revenue within the United States, but that is beginning to change. In 2023, the company launched native payroll services in Mexico and Canada, followed by the United Kingdom and Ireland in early 2024. These moves represent the first steps in a broader international strategy that could significantly expand Paycom’s addressable market. While still early in execution, management has expressed strong enthusiasm for the long-term opportunity, particularly as multinational companies increasingly seek unified, cloud-based HCM platforms that can support employees across multiple countries. Importantly, Paycom is pursuing this strategy in a focused and measured way. Rather than entering new regions blindly, the company is targeting countries where its U.S.-based clients already have significant operations—potentially expanding into around 20 countries. This client-led approach helps reduce risk and increases the likelihood of successful adoption. For example, a recent win with a large international sports organization showcased Paycom’s ability to meet global payroll needs across multiple countries, reinforcing the product’s scalability. As more multinational companies look for a single provider to manage global payroll and HR functions, Paycom’s growing international footprint could become a major competitive advantage. Over time, international expansion has the potential to serve as a meaningful growth catalyst - both by deepening relationships with existing clients and by opening new markets entirely. While the contribution to revenue is still modest today, this strategic move positions Paycom for broader global relevance and long-term upside.

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Valuation

Now it is time to calculate the share price. I perform three different calculations that I learned at a Phil Town seminar. If you want to make the calculations yourself for this or other stocks, you can do so through the tools page on my website, where you have access to all three calculators for free.

The first is called the Margin of Safety price, which is calculated based on earnings per share (EPS), estimated future EPS growth, and estimated future price-to-earnings ratio (P/E). The minimum acceptable rate of return is 15%. I chose to use an EPS of 8,92, which is from the year 2024. I have selected a projected future EPS growth rate of 15%. Finbox expects EPS to grow by 15,5% in the next five years. Additionally, I have selected a projected future P/E ratio of 30, which is double the growth rate. This decision is based on Paycom Software's historically higher price-to-earnings (P/E) ratio. Finally, our minimum acceptable rate of return has already been established at 15%. After performing the calculations, we determined the sticker price (also known as fair value or intrinsic value) to be $267,60. We want to have a margin of safety of 50%, so we will divide it by 2. This means that we want to buy Paycom Software at a price of $133,80 (or lower, obviously) if we use the Margin of Safety price.

The second calculation is known as the Ten Cap price. The rate of return that a company owner (or stockholder) receives on the purchase price of the company essentially represents its return on investment. The minimum annual return should be at least 10%, which I calculate as follows: The operating cash flow last year was 534, and capital expenditures were 193. I attempted to analyze their annual report to calculate the percentage of capital expenditures allocated to maintenance. I couldn't find it, but as a rule of thumb, you can expect that 70% of the capital expenditures will be allocated to maintenance purposes. This means that we will use 135 in our calculations. The tax provision was 147. We have 55,9 outstanding shares. Hence, the calculation will be as follows: (534 – 135 + 147) / 55,9 x 10 = $97,67 in Ten Cap price.

The final calculation is referred to as the Payback Time price. It is a calculation based on the free cash flow per share. With Paycom Software's free cash flow per share at 6,10 and a growth rate of 15%, if you want to recoup your investment in 8 years, the Payback Time price is $96,99.

Conclusion

I believe that Paycom Software is an intriguing company, and although there has been some recent controversy surrounding the CEO, his high employee rating and track record of accomplishments suggest he remains the right person to lead the business. Paycom has built its moat through a single-database platform developed entirely in-house, deep automation and employee self-service capabilities, a high-touch client service model, and strong brand trust supported by industry recognition. The company has consistently delivered a high return on invested capital and has increased both equity and free cash flow every year for the past decade. Competition is a risk for Paycom due to larger rivals with deeper resources and more flexible platforms, as well as rising price pressure from low-cost alternatives that could affect margins and client growth. Data security is also a key risk, as Paycom handles highly sensitive client data and remains a target for increasingly sophisticated cyberattacks. Breaches - whether through its own systems or third-party vendors - could lead to legal, financial, and reputational harm. Government regulation adds another layer of risk, as Paycom operates in a complex, evolving legal landscape spanning tax, labor, payroll, and privacy. Regulatory changes or compliance failures could result in penalties, added costs, or reduced demand for its services. Paycom’s software portfolio - particularly Beti and GONE - is a core reason to invest, as these tools automate key HR tasks, drive strong client ROI, and reinforce the company’s leadership in HCM automation. Winning more customers is another reason to invest, with Paycom gaining market share - especially among larger clients - which supports revenue growth and strengthens retention. With just 5% market share and a scalable sales model, the company has significant room to expand its recurring revenue base. International expansion also holds long-term promise, as Paycom enters new countries in a client-led and focused way, opening up a much larger addressable market and deepening relationships with multinational organizations. I believe Paycom is a great company, and buying shares at $145 - which would represent at least a 25% discount to intrinsic value under all three of my valuation methods - could be a compelling long-term investment.

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