Phase Space AI

Valuation

Paycom Software [PAYC]

Paycom Software, Inc. [PAYC] — Valuation

Two outputs, two horizons, neither substituting for the other. Spot $170.67 (2026-07-29 10:48 ET, Alpaca SIP). Last full close 2026-07-28: $161.72.

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1. EVERY JUDGEMENT INPUT, STATED EXPLICITLY

This section exists so the PAYC and PCTY runs can be compared parameter by parameter. Nothing below is implicit and nothing is inherited from the screen.

1.1 Balance-sheet and scale inputs (all verified to primary filings)

1.2 Discount rate — WACC built bottom-up

Stated caveat on beta: 0.78 is measured over a period in which PAYC fell largely idiosyncratically, which mechanically suppresses measured beta. A higher forward beta is defensible. WACC sensitivity is run explicitly in §3.3 (8.5%–11.0%) rather than adding silent conservatism to the point estimate.

1.3 Terminal margin

1.4 Exit multiple — growth-matched, or declared unidentified

The anchor set is PAYC's own post-break trading history, not a peer median. The full history is unusable and is declared so: PAYC's EV/EBIT median was 53.6x over 2019–2026 and 19.0x post-break. The 2023-11-01 event (−38.51% in one session) is a hard regime break and the pre-break sample cannot inform a forward multiple for a 9% grower.

Own-history distributions, post-2023-11-01 only (686 trading days, point-in-time shares and net cash):

Growth-matched cross-check on the comparator set (verified from each company's own 10-K, not a screen):

The comparator set brackets PAYC's growth at the exit year on the low side (ADP/PAYX at 5–7%) and the high side (PCTY at 13.7%). The anchor is therefore identified, not UNIDENTIFIED — but PAYC's own post-break history is the primary anchor and the peers are the cross-check, per valuation.md.

BASE EXIT MULTIPLE: 15.0x EBIT. Argument, stated because the criteria require one: 15.0x sits at PAYC's own post-break 25th percentile (14.9x) and essentially at today's 14.71x (p24). It is 21% below the own-history median of 19.0x and below the PCTY cross-check of 20.7x. It is not below every stated anchor — it is at the p25 anchor and above the p10 (11.8x) and the min (10.2x). The reason for choosing p25 rather than the median: at the exit year PAYC will be growing ~6–7%, materially slower than the ~9–10% that prevailed across the post-break sample, so the low end of its own post-break range is the honest match. Implied compression from today's 14.71x trading multiple: +0.29x, i.e. +2.0% — essentially none. The base case does not assume the market re-rates the stock, in either direction.

1.5 The demonstrated-growth window — the number the strategy ranks on

The screen's 14.24% is arithmetically correct and analytically wrong. Four separate figures, and what each is worth:

DEMONSTRATED = 8.80%. Stated as the primary; the 10.26% FY2025 figure is carried as the generous alternative and both are shown against the required path below.

1.6 NTM revenue build — line by line (no consensus available)

Alpha Vantage returned its rate-limit response; Consensus Criteria is INDETERMINATE and blocks nothing. This is therefore a house build from disclosed quarterly actuals. Every input is printed.

Judgements inside the build, named: - Recurring growth decelerates 8.5% → 7.9% across the four quarters. Basis: the observed deceleration is ~1–2pp per year (18.1 → 10.9 → 10.3 → 8.8); 0.2pp per quarter continues that trend at its recent, slower rate. I am not assuming the deceleration stops. - Float income held roughly flat at ~$28.4m/quarter. Basis: quarterly float has already troughed ($30.5 → $28.5 → $26.8 → $27.2 → $27.8m) and the 3-month UST has risen from 3.63% (2026-01-02) to 3.90% (2026-07-28). Balances grow with client employment and wages; yield roughly flat. No rate forecast is embedded beyond "the front end stays near 3.9%." - NTM revenue growth implied: +7.9% vs TTM. - NTM operating margin: 28.4% (between the 28.30% TTM actual and the four-year 27.6% mean). → NTM EBIT $641m. - Below the line: interest expense ~$38m on the drawn revolver, other income ~$15m on remaining corporate cash → pre-tax ~$618m, tax 24% → NTM net income ~$470m. - Share count at the target date: 45.5m, assuming ~$400m of the $2.0bn authorisation is executed over the next twelve months at ~$175 (≈2.3m shares), funded from FCF after the $71m dividend. → NTM EPS ≈ $10.33. - Net debt at the target date: $550m, i.e. roughly unchanged — FCF ~$450m less dividend ~$71m less buyback ~$400m ≈ −$21m. The single most sensitive assumption in the target.

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2. THE 12-MONTH TARGET

Method: NTM EBIT × a multiple anchored on PAYC's own post-break trading range, less net debt, divided by the forecast share count. Not a DCF. Not a peer median.

12-MONTH TARGET: $213 — +25.0% above spot.

Multiple used: 16.0x forward EBIT = the 39th percentile of PAYC's own post-break EV/EBIT range. Today the stock is at the 24th percentile (14.6x). The target assumes a partial, not full, reversion toward the post-break median of 19.0x.

P/E cross-check: $213 ÷ NTM EPS $10.33 = 20.6x, versus a post-break P/E range of p25 19.3x, median 24.9x, p75 30.9x. Internally consistent at roughly the 33rd–39th percentile on both measures.

Named events that move estimates inside the window (each dated in PAYC_Catalyst_Calendar.md): Q2 FY2026 results and the first read on whether ex-float recurring growth holds ≥8.5%; the FY2027 guide at the Q4 print; execution against the $2.0bn repurchase authorisation; the front-end rate path into float income; the first quantified disclosure (if any) of IWant adoption.

Sanity band and honest caveats: - No verified external target was obtained. A secondary aggregator reported "Buy consensus, 12 analysts" with no target figure traceable to source. Per valuation.md an external target is a check on the output; none was available, so none is claimed. - The base price is suspect. Spot is +22.5% in five sessions with no documented cause — no 8-K, no earnings, and the move was sector-wide (PCTY +21.1%, ADP +14.3%, WDAY +25.4%) against SPY −1.6%. A week ago the same target on the same fundamentals would have been +53% to spot. If the last five days retrace, the target is unchanged and the upside re-widens; if the move reflects information I cannot see, the target may be stale. This is the largest single uncertainty in the number. - The target is sensitive to the buyback: every incremental $500m repurchased at ~$175 adds ~2.9m shares of retirement and ~$500m of net debt, roughly a wash at 16x but strongly accretive above it.

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3. THE IMPLIED-PATH TEST — the Valuation Criteria

Terminal value is ~100% of EV in this construction, so the reverse DCF is the primary long-horizon output and the forward DCF is supporting evidence only. Run with ~/.claude/skills/investment-memo/assets/reverse_dcf.py.

3.1 Base run — all-in (screen-comparable)

--spot 170.67 --shares 48.0 --net-cash -521.1 --revenue 2093.0
--years 5 --wacc 0.091 --terminal-margin 0.276 --exit-multiple 15.0 --solve cagr

Parameter solved for: 5-year revenue CAGR. Parameters held fixed, named: terminal EBIT margin 27.6%; exit multiple 15.0x EBIT; WACC 9.10%; horizon 5 years; diluted shares 48.0m; net debt $521.1m; revenue base $2,093.0m.

THE MARKET REQUIRES: revenue CAGR of 9.22%.

Exit multiple used: 15.0x EBIT. Implied compression from today's 14.71x trading multiple: +0.29x, i.e. +2.0% — essentially none.

3.2 Ex-float run — the float removed from both sides

Float income is capitalised separately at 10x ($110.3m × 10 = $1,103m) and removed from EV; the software business is then valued on ex-float revenue and margin. 10x is used rather than the 15x applied to the software because the float stream has no growth, no operating leverage, no pricing power and a beta to Fed policy — it deserves a lower multiple, and saying so explicitly is the point.

EV ex-float = $8,713m − $1,103m = $7,610m ; revenue $1,982.7m ; terminal margin 24.3% ; exit 15.0x

REQUIRED ex-float revenue CAGR: 10.23%. vs ex-float 3-yr CAGR 13.03% → +2.80pp. vs Q1'26 ex-float run-rate 8.80% → −1.43pp.

The two runs agree. Whichever way the float is handled, today's price requires the software business to grow at or slightly above what it is currently doing, for five years, with no further deceleration.

3.3 SENSITIVITY — over the exit multiple, and over WACC

Exit multiple (the highest-variance parameter):

WACC (at the base 15.0x exit):

FLIP POINTS — the exit multiple at which required = demonstrated:

3.4 Where the screen's +12.5pp came from

At the verified inputs above, reproducing the screen's 1.8% required CAGR requires either: - an exit multiple of 21.3x EBIT — the 64th percentile of PAYC's own post-break range, 45% above today's 14.7x, and above the PCTY cross-check of 20.7x; or - a terminal EBIT margin of 39.2% at 15.0x — versus 27.6% delivered and 24.3% ex-float.

Neither is supportable. The screen's +12.5pp margin is an exit-multiple artifact stacked on an inflated demonstrated CAGR. The honest margin is −0.4pp to +1.0pp, not +12.5pp.

3.5 Verdict on the Valuation Criteria

PASS WITH ARGUMENT

Why not a clean PASS. Required 9.22% sits 0.42pp above the 8.80% ex-float run-rate. The price requires the four-year deceleration (18.1 → 10.9 → 10.3 → 8.8) to stop, flat, for five years.

The argument, and it is specific and evidenced, not narrative: 1. The base case already embeds a 21% multiple haircut to the name's own post-break median. At the median 19.0x the required CAGR is 4.18% — a margin of +4.6pp, comfortably passing. The Criteria's own rule ("the base exit multiple may not sit below every stated anchor without a separately argued reason") is respected: 15.0x is at the p25 anchor, and the argument for choosing p25 over the median is stated in §1.4 (slower growth at the exit year). The result is that the test turns entirely on the exit multiple, and the sensitivity above is the honest presentation of that. 2. The float is a tailwind from here, not a headwind. Float income has troughed and the front end has risen 27bp year-to-date. Two of the last four years' headline deceleration was the float rolling over; that drag reverses. 3. The buyback changes the per-share path even at zero enterprise growth. The reverse DCF solves for enterprise value. Paycom retired 13.7% of its shares in one quarter at ~$128 against $171 today and has a $2.0bn authorisation (25% of market cap) live since 2026-05-04. At a 5.5% FCF yield, repurchase is a dated, contractual, evidenced return mechanism — the one the Quality Criteria asks for when a compounder's reinvestment runway shortens.

Against the argument, recorded so it is not lost: the mechanism for revenue growth (IWant / AI) is named but has no disclosed adoption metric; a 91% gross retention rate means ~$175m/yr must be replaced before growth starts; and the last time Paycom shipped a step-change automation product it cut its own revenue by enough to halve the stock in one session.

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4. Forward DCF — supporting evidence only

Terminal value is essentially all of EV at a 5-year horizon on this construction, so a forward DCF adds nothing the reverse DCF has not already made explicit. It is deliberately not run as a separate instrument. The 5-year DCF-derived price target is retired under the current framework (item B16).

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5. Downside Criteria — the permanent-loss case, with a named cause

Type: MEASURED. Logged, scored, and it rejects nothing.

BEAR: $79.75 — −53.3% from spot.

Path: 4.0% revenue CAGR, 24.0% terminal EBIT margin, 11.0x exit EBIT (p5 of own post-break range), WACC 9.10%.

The named cause — "Beti, again." Paycom's own product strategy is automation that removes human interaction with the software. In 2021–23 that was Beti and GONE, and the documented consequence was the elimination of billable service revenue, a guidance reset, and a −38.51% single session on 2023-11-01. The FY2025 10-K introduces IWant, a natural-language AI agent over the employee database, and AI mentions in the 10-K rose 20 → 49 in one year. A genuinely capable agent layer reduces the reason to buy and learn additional priced modules — it is the same mechanism aimed at a larger surface. Combined with: - 91% gross revenue retention (~$175m of recurring revenue lost per year and replaced before growth), - mid-market SMB employment exposure — revenue is per-employee-per-month, so a labour-market contraction cuts revenue at existing clients with no churn event at all, - float income falling with the front end if rates cut hard, - a levered balance sheet for the first time ($675m drawn, plus a live $2.0bn authorisation),

recurring growth falls to low single digits, the margin gives back ~4pp defending the base, and the multiple compresses to the bottom of the post-break range.

More severe variant (2.0% CAGR, 22.0% terminal margin, 10.0x exit): $57.67, −66.2%.

Going concern: NOT AT RISK, and this is argued rather than asserted. TTM FCF $445.8m against $675m of revolver debt and a covenant leverage limit of 3.5x on ~$770m of EBITDA. There is no realistic path to insolvency. The permanent-loss case is a multiple-and-growth impairment, not a balance-sheet one — which is exactly why it is a −53% case and not a −90% one.

Bull case for symmetry (11% CAGR, 28% terminal margin, 19.0x exit, WACC 9.10%): $242.03, +41.8%.

Probabilities logged to the ledger: bear 30%, base 45%, bull 25%. These are stated estimates for Brier scoring, not calculations.

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6. Summary of every judgement input (for the paired comparison)