Stock Update: Workday & Paycom

Stock Update: Workday & Paycom

We are long-term investors here at MyWallSt and recommend companies that we believe will have consistent growth for years to come. Updates are an opportunity for us to reaffirm our stance on a company while keeping you up to date on its developments. By renewing our comments with the latest information, we ensure that investors have confidence in our selections, regardless of their start date.

If you've ever seen an episode of The Office (U.S. version, sorry U.K.), you'll know that the one person Michael Scott hates the most is Toby Flenderson. Toby is the HR representative — or as Michael calls him: "a thief of joy" — banished to the annex and only emerging to lead some corporate-mandated training or address one of Dwight's many scandals. He's dull, he doesn't say much, and when he finally quits and moves to Costa Rica, he immediately falls while zip-lining and has to return home. To sum up, Toby is boring. I am about to introduce you to the Toby of the investment world: the Human Capital Management market.

Like Toby, HCM is closely tied to human resources and helps companies digitize and streamline processes like recruitment, training, payroll, and performance management. Its goal is to maximize the value of its workforce and find ways to improve efficiency and save money. Over the last few years, the adoption of HCM solutions has been widespread, especially in large enterprises with a significant number of employees in the United States. However, this market is limited, there are only so many Fortune 500 companies (500 to be exact), and big sector players like Oracle, Workday, and SAP have already penned multi-year deals with most of them. This means that the real growth in the HCM market in the coming years will be in the small and medium-sized business segment and outside the United States.

The MyWallSt shortlist contains two HCM players, Workday (WDAY) and Paycom (PAYC), which will tackle the changing market with very different strategies. Workday is a behemoth known for partnering with large companies. Last year it created the largest cloud-based HCM system in the world when it finalized its contract with Walmart. However, this specialization also explains the company's slowing revenue growth. In Q3 2021, revenue growth was 17.9% year-over-year compared to 26% in Q3 2020. Importantly, this trend began before the impacts of COVID-19 — in Q3 2019 revenue growth measured 34%. Many analysts have attributed this to significant market penetration within large accounts, meaning Workday will continue to bring in recurring revenue but won't be able to sign as many new clients and grow as it has in the past. So now the company's eyes turn towards the Asia-Pacific (APAC) region where HCM solutions are expected to grow at a compound annual growth rate of 19.4% by 2023. Workday has begun investing heavily in the region, in addition to targeting more medium-sized businesses in the United States. If the company's investments pay off, this could usher in a new period of substantial growth. However, in the meantime, the company's financials look healthy and its stock should maintain a stable, slow climb.

On the other hand, Paycom built its brand on partnering with small and medium-sized businesses often ignored by big sector players. While this has the potential to make recurring revenue volatile, as clients pay on a per-employee basis, Paycom has ensured stable growth by constantly signing new enterprises. Even during the pandemic, the company was able to efficiently adapt its products for work-from-home and made up for losses by increasing its marketing spending and finding new sales. The company's products are also known for their simplicity and ease-of-use, perfect for entrepreneurs and companies that may lack the resources for a dedicated HR department. SMEs with less than 500 employees represent 99% of all businesses in the United States and, for many of these, the pandemic highlighted the need for greater digitization. Paycom is well-positioned for a market trending in its favor and should see continued growth for the next few years.

Due to these changes to the HCM segment, we have updated our comments on Workday and Paycom. To start with Workday, click on the stock button below.

Anne MarieAnne Marie