Investing in stocks that have plummeted over 70% can be risky. Historical data often shows that winning stocks continue to win, and it's usually better to nurture your best performers and weed out the laggards. However, there are exceptions to this rule. One such exception is Paycom, a company that specializes in human capital management (HCM) software-as-a-service (SaaS) solutions. Currently, Paycom's stock is 70% off its high. In 2019, Paycom had sales of roughly $600 million and a share price around $170. Today, the share price remains similar, but revenue has nearly tripled.
This, coupled with Paycom's solid free cash flow, makes its current valuation potentially a once-in-a-decade opportunity. Although the market is skeptical about Paycom's growth story, there are compelling reasons to consider buying and holding its shares for the long term. The main reason for Paycom's declining share price is its slowing sales growth rate. According to YCharts, Paycom's revenue growth has decelerated, but management points to the launch of its Beti payroll platform in late 2021 as a significant factor. By allowing employees to manage their own payroll, Beti reduces common errors and minimizes the need for payroll reruns.
While this is beneficial for customers, it has cannibalized some of Paycom's existing sales. Investors with a long-term perspective should see this as a worthwhile trade-off. Paycom's focus on customer satisfaction has resulted in an impressive Net Promoter Score (NPS) of 67, significantly outperforming competitors like Paychex, Workday, and ADP. Paycom's high NPS indicates strong customer loyalty and satisfaction, providing a solid foundation for future growth. Recent developments hint that the slowdown in sales growth may be temporary. During the second-quarter earnings call, Founder and CEO Chad Richison revealed that the company sold 24% more units year-over-year in Q2.
Furthermore, revenue from July starts is up 40%, suggesting that higher sales growth might be on the horizon. Paycom's international expansion into Canada, Mexico, the U.K., and Ireland could further boost its growth. One of Paycom's standout qualities is its commitment to innovation and customer satisfaction. Despite increasing spending on research and development (R&D), the company continues to generate robust free cash flow. Paycom's recent product, GONE, automates time-off requests and has shown to be cost-effective for clients. According to an Ernst & Young study, each manual time-off review or approval costs a company an average of $30.92.
By maintaining its status as a cash-rich company while ramping up R&D, Paycom is well-positioned for long-term growth. What makes Paycom especially attractive now is its low price-to-free-cash-flow ratio, a valuation it hasn't seen in a decade. With $346 million in cash and no long-term debt, the company has initiated a $1.5 billion share buyback plan. This buyback, representing a significant portion of its $9.7 billion market cap, could help bolster its share price. Additionally, Paycom offers a 0.9% dividend, although it hasn't increased since its inception six quarters ago.
Management seems to be prioritizing buying back shares at current low prices rather than increasing the dividend. Over the coming years, Paycom's sales growth might rebound. Coupled with its track record of profitable innovation, this sets the stage for long-term success. At its current valuation, Paycom offers a rare opportunity for investors willing to buy and hold for the long haul.
