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Why Paycom Will Continue to Take Market Share

It's impressive when a company has a long track record of winning customers and growing revenue. Payroll processor and human resources management software provider Paycom Software (NYSE: PAYC) is one of those companies. On a Fool Live episode recorded on June 30, Fool contributors Brian Feroldi and Brian Stoffel talk about what makes this company special and why it's continued to grow in the face of significant competition.

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Brian Stoffel: The one I'm going to talk about is Paycom. Like Zendesk, it's done really well. But before we get to that, I just want to talk about what it does. It was founded by, I believe it's Chad Richison. I think I'm pronouncing his last name right. Chad worked for a legacy payment payroll company. And at his time there, what he realized was that they really did not a very good job of meeting the needs of small and medium-sized businesses. They could handle the big titans of industry, but when it came to the smaller players and there's so many of them, they weren't doing a great job.

He started there and then moved into HR as well, which is basically how you handle your leads, your hiring, your promotions, whatever it might be. Two different functions; payroll and human resources, and created a software-as-a-service platform to offer these to small and medium-sized businesses, which is basically between 50 and 5,000 employees. They started with the smaller end and they've been working their way up since. Again, this is a company I've only bought once and I've never bought again just because [it] doesn't get a whole lot of love. But look at just what it's done since they went public. You thought Zendesk was impressive. This is almost 23-bagger.

We can look at the company's revenue, and again, it continues to go up into the right with a little bit of a downtick since that trajectory has changed a little bit since the onset of the pandemic. But on an absolute basis, this company generates lots, since 2015 has been positive free cash flow. I will say like Zendesk, it's not cheap, it's trading for 150 times free cash flow. That's because the company is going after huge opportunities here. I'm just throwing a little bit of light on a company that I think deserves a little bit of it.

Brian Feroldi: Love it. You highlighted at the top of the show that payroll is a crowded market: Intuit, Paychex, ADP, Paylocity, not to mention a dozen other smaller niche providers. Why is Paycom taking share?

Stoffel: I'm not a payroll or HR specialist, in fact, I'm probably the furthest thing you could get from that. But what I will say is we've discussed a bunch of times about Airbnb and Vrbo. What was the difference? It was the interface, it was just better, it was more intuitive, and people went to Airbnb. What's the difference between Zoom [Video Communications] and all the other products that existed before it? It was just better. Like that's all it was. It was better, and because it's marketed as software-as-a-service tool, not only is it better, but once people are in that ecosystem, they tend to stay unless they've got a really good reason to leave.

With Paycom, I really believe that one of the big differences is that Richison started out in this industry, saw where the problem was, and developed a very specific product to address the shortcomings. By doing that, won over customers got them in ecosystem and they keep on going.

Feroldi: Awesome. As a long-term Paycom shareholder, I appreciate you bringing it to the forefront.

Stoffel: Yeah, same here.

Brian Feroldi owns shares of Paycom Software, Paylocity Holding, and Zoom Video Communications. Brian Stoffel owns shares of Airbnb, Inc., Paycom Software, Zendesk, and Zoom Video Communications. Brian Withers owns shares of Zoom Video Communications. The Motley Fool owns shares of and recommends Airbnb, Inc., Intuit, Paycom Software, Zendesk, and Zoom Video Communications. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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