Paycor HCM, Inc. (NASDAQ:PYCR) has just announced its fiscal Q4 and full-year 2023 results as Seeking Alpha has covered here. Based on initial reaction, it appears like Mr. Market is not all too excited about the results as the stock has fluctuated between 2% and 8% down. But, as I keep reminding myself, post-earnings action can change direction on a dime. But what do Paycor’s result and guidance mean for the short to medium term? Let’s find out in Paycor’s version of The Good, The Bad, and The Ugly. But a brief introduction to the company before that.
What Does Paycor Do?
Paycor provides businesses (typically small to medium) with an integrated platform that helps them conduct all HR oriented tasks from onboarding to payroll to talent management. In other words, as the “HCM” in the company’s name indicates, it provides Human Capital Management platforms to businesses to better utilize the most valuable (and most expensive) form of capital any company has: its employees.
- Paycor beat on both top and bottom lines in Q4. This extends the company’s EPS beat streak to 7 and revenue beat streak to 9, as confirmed here by Seeking Alpha.
- FY 2023’s revenue grew by nearly 30% as shown below but more importantly, the company guided FY 2024’s revenue well above the consensus to an upper limit of $650 million.
- Paycor’s Total Addressable Market (“TAM”) remains strong with small and medium business (“SMB”) considered the heartbeat of American communities. The company has <2% share at this point, making the case for projected growth with a TAM between $35 billion and $44 billion.
- Paycor’s operating expenses as a percentage of revenue have stayed in the late 50s throughout its early life as a public company, with Q4 2023 reporting 57%. The fact that this has not reduced through COVID lows and the post-recovery highs (in terms of general economic recovery) tells me most of the company’s expenses are firmly set and will be stickier to eliminate or streamline. This makes top line growth all the more important since early signs are that the bottom-line expansion looks tough at best.
- Paycor’s stock based expense went up 65% YoY in Q4 and 38% YoY in FY 2023. This should not surprise anyone in the early days as a public company, but is still something to keep an eye on as the company matures as a public company. Overall, shares outstanding has increased by 3% since the IPO 2 years ago.
- Although Paycor has been a public entity for just two years, it has been in existence for 30 years as the company proudly highlights in its Q4 presentation. And the company is still losing money on GAAP basis. Operating loss in FY 2023 was ~$105 million and the only solace is that it was down significantly from the ~$140 million loss in FY 2022.
- I was a former user of Paycor at my job and we recently moved away to another provider. My personal experience with Paycor was all right, but nothing stood out, meaning it was a run-of-the mill HCM platform. In the few quarters it has been since our migration, I have not missed a single feature that Paycor had that the replacement doesn’t. The market reality is that there are big league players like Oracle Corporation (ORCL) and Automatic Data Processing (ADP) that swim at a higher level, and the SMB space is filled with many private companies and even homegrown systems that are far more cost-effective than the likes of Paycor.
- Tying up the two points above, the fact that the company has <2% share after 30 years in existence speaks volumes about the fragmented nature of the market.
- I don’t like overpaying even for companies with marketable, key differentiating products. So, with my personal experience above, I find it mind-boggling that the stock is trading at
- 51 times 2024’s non-GAAP expected EPS of 43 cents
- 6 times 2024’s higher-end sales guidance of $650 million
Before I looked up the details for this article, if someone had told me that Paycor HCM, Inc. stock was trading at 6 times sales given the space it operates in, I’d have said, “No way, this is not 2021.” But here we are. In a massively competitive space, with no Unique Selling Point (in my personal experience), this stock has no business trading at such lofty valuation despite the TAM. And remember, SMB’s are more cost sensitive and are much more likely to shop around or do without expensive platforms.
Overall, I believe Paycor HCM, Inc. has challenges on many fronts including but not limited to inability to fight above its league (SMBs) while fighting off smaller and home-grown platforms and at the same time ensuring it doesn’t overprice the SMBs. And the company’s numbers since going public don’t give me much confidence in their ability to keep costs low, either. In the light of all these points, I rate Paycor HCM stock a Sell.