Paycom Software Stock Surges Over 25% in October Amid Robust Q3 Revenue Growth

Key Highlights from Paycom Software’s Q3 Earnings

On October 30, Paycom released its Q3 2024 financial results, revealing an 11.2% year-over-year revenue increase, reaching $451.9 million. This improvement came alongside a steady net income of $73.3 million. Impressively, this quarter showed an uptick in revenue growth compared to the prior quarter, where year-over-year sales growth had slowed to just 9%.

Investors had previously expressed concerns about a potential revenue slowdown for Paycom, a company traditionally recognized for its strong double-digit revenue increases. Historically, the software provider has achieved growth rates near 30% in past years. This reversal in revenue momentum during Q3 was viewed as an optimistic indicator, sparking renewed investor interest.

Paycom’s Continued Success in Cloud-Based Automation

A key driver behind Paycom’s Q3 performance is its successful cloud-based automation software, which simplifies payroll and HR management for companies, resulting in substantial time savings for administrative teams. The company has strategically expanded its offerings by introducing a quarterly dividend, now yielding around 1%, and maintaining a stock buyback program, providing shareholders with additional avenues for returns.

As a profitable company, Paycom’s cash flow has steadily risen over recent years, exceeding $300 million in the past 12 months alone. This strong cash generation highlights Paycom’s ability to return capital to shareholders while driving growth and innovation in HR and payroll automation.

Current Valuation: What Investors Should Consider

With the stock trading at higher multiples, investors may question if the current valuation justifies holding onto Paycom shares. As of its current market cap of $12.3 billion, the stock trades at a price-to-free cash flow (P/FCF) ratio of 41, which is notably higher than the S&P 500 average. This shift reflects the market’s renewed confidence in Paycom’s future growth potential.

However, selling shares at this point may not be necessary. Over the past five years, Paycom’s free cash flow has seen a cumulative increase of 132%, with revenue growth reaching a cumulative 147%. If Paycom sustains this momentum, its free cash flow multiple will gradually decrease, potentially driving further stock gains.