What a time it’s been for Paycor. In the past six months alone, the company’s stock price has increased by a massive 59.4%, reaching $22.35 per share. This was partly due to its solid quarterly results, and the performance may have investors wondering how to approach the situation.
Is now the time to buy Paycor, or should you be careful about including it in your portfolio? See what our analysts have to say in our full research report, it’s free.
We’re happy investors have made money, but we don't have much confidence in Paycor. Here are three reasons why there are better opportunities than PYCR and a stock we'd rather own.
Why Is Paycor Not Exciting?
Founded in 1990 in Cincinnati, Ohio, Paycor (NASDAQ: PYCR) provides software for small businesses to manage their payroll and HR needs in one place.
1. Low Gross Margin Reveals Weak Structural Profitability
For software companies like Paycor, gross profit tells us how much money remains after paying for the base cost of products and services (typically servers, licenses, and certain personnel). These costs are usually low as a percentage of revenue, explaining why software is more lucrative than other sectors.
Paycor’s gross margin is worse than the software industry average, giving it less room than its competitors to hire new talent that can expand its products and services. As you can see below, it averaged a 66% gross margin over the last year. Said differently, Paycor had to pay a chunky $34.03 to its service providers for every $100 in revenue.
2. Operating Losses Sound the Alarms
While many software businesses point investors to their adjusted profits, which exclude stock-based compensation (SBC), we prefer GAAP operating margin because SBC is a legitimate expense used to attract and retain talent. This is one of the best measures of profitability because it shows how much money a company takes home after developing, marketing, and selling its products.
Although Paycor broke even this quarter from an operational perspective, it’s generally struggled over a longer time period. Its expensive cost structure has contributed to an average operating margin of negative 2.7% over the last year. Unprofitable, high-growth software companies require extra attention because they spend heaps of money to capture market share. As seen in its fast historical revenue growth, this strategy seems to have worked so far, but it’s unclear what would happen if Paycor reeled back its investments. Wall Street seems to be optimistic about its growth, but we have some doubts.
3. Free Cash Flow Projections Disappoint
Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.
Over the next year, analysts’ consensus estimates show they’re expecting Paycor’s free cash flow margin of 10.2% for the last 12 months to remain the same.
Final Judgment
Paycor isn’t a terrible business, but it doesn’t pass our quality test. After the recent surge, the stock trades at 5.2× forward price-to-sales (or $22.35 per share). Beauty is in the eye of the beholder, but our analysis shows the upside isn’t great compared to the potential downside. We're fairly confident there are better investments elsewhere. We’d suggest looking at the Amazon and PayPal of Latin America.
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