2 Reasons PCTY is Risky and 1 Stock to Buy Instead

Over the last six months, Paylocity’s shares have sunk to $181.27, producing a disappointing 11.5% loss - a stark contrast to the S&P 500’s 6.4% gain. This might have investors contemplating their next move.

Is now the time to buy Paylocity, or should you be careful about including it in your portfolio? Check out our in-depth research report to see what our analysts have to say, it’s free.

Why Is Paylocity Not Exciting?

Even though the stock has become cheaper, we're swiping left on Paylocity for now. Here are two reasons why we avoid PCTY and a stock we'd rather own.

1. Projected Revenue Growth Is Slim

Forecasted revenues by Wall Street analysts signal a company’s potential. Predictions may not always be accurate, but accelerating growth typically boosts valuation multiples and stock prices while slowing growth does the opposite.

Over the next 12 months, sell-side analysts expect Paylocity’s revenue to rise by 7.6%, a deceleration versus This projection doesn't excite us and implies its products and services will face some demand challenges.

2. Low Gross Margin Hinders Flexibility

For software companies like Paylocity, 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.

Paylocity’s gross margin is slightly below the average software company, giving it less room than its competitors to invest in areas such as product and sales. As you can see below, it averaged a 68.9% gross margin over the last year. That means Paylocity paid its providers a lot of money ($31.06 for every $100 in revenue) to run its business.

Final Judgment

Paylocity isn’t a terrible business, but it doesn’t pass our bar. After the recent drawdown, the stock trades at 5.9× forward price-to-sales (or $181.27 per share). Investors with a higher risk tolerance might like the company, but we don’t really see a big opportunity at the moment. We're fairly confident there are better investments elsewhere. Let us point you toward an all-weather company that owns household favorite Taco Bell.

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