Record-low unemployment and improving workforce participation are the economic drivers for one of my most recent stock picks. But it also has structural winds at its back: the cloud.
Plus, with the cloud, software and services are delivered on demand, and the user typically pays for a recurring subscription to the software-based service -- in other words, users pay only for as much of the services as they need. These positives of the cloud model are especially useful for small- and midsize firms where resources are often limited. No wonder businesses are actively investing in and switching to the cloud-computing model.
The best cloud providers -- including my most recent pick -- are able to ride the wave of this growth, and should deliver fantastic long-term gains to investors.
My Latest Clout Pick
Paylocity Holding (Nasdaq: PCTY) is a provider of payroll and human capital management software and services.
What sets it apart from its larger competitors Automatic Data Processing (Nasdaq: ADP) and Paychex (Nasdaq: PAYX) is that it delivers its services via the Software-as-a-Service (SaaS) model. This means that Paylocity delivers its wares via the cloud, having streamlined payroll and human resources services into a single online-based system.
Paylocity has been outgrowing the SaaS market for the past decade. The company, which I briefly profiled in May, is a pure-play cloud business, which should be able to continue growing at a better than 20% annual rate for the next few years.
As a pure-play cloud business that can grow this fast (and is already profitable), Paylocity can also become an acquisition target for a number of large tech companies looking to diversify, for a larger-cap cloud peer looking to consolidate -- or even for a group of competing payroll processors -- such as ADP, PAYX or TriNet (Nasdaq: TNET) – that may be looking to beef up their cloud presence and competitive standing.
The company's offerings include payroll processing as well as human resources software such as time management, benefits administration, and more. Built with the mid-sized market in mind (think 20 to 1,000 employees), this software suite has been successful in the targeted market, as can be seen from a customer retention rate of better than 92%, which has been consistent over the years. The last 18 to 24 months have seen higher interest and growing adoption of its human-resource offerings beyond the payroll -- which bodes well for the future, too.
Another interesting thing to note, Paylocity has 310 salespeople peddling Paylocity's services in all 50 states. That's significantly less than the salesforce of ADP (5,000 salespeople) and PAYX (3,000), but PCTY also utilizes a large network of brokers. In fact, more than a quarter of new business comes from the broker channel. This means that people who are not employed by PCTY, such as health insurance brokers or 401(K) advisors, significantly contribute to the growth of the company. This way, Paylocity is able to develop strong sales leads at numerous localities without actually having to deploy a larger sales force around the country.
Action To Take
Since its 2014 IPO, Paylocity has notched a series of successes, including the latest nine-quarter streak of mid-20s growth, 20%-plus revenue growth target and the most-current goal of adjusted EBITDA growth between 30% and 35%.
Part of the ongoing digital transformation and a major beneficiary of the future growth in the cloud, PCTY is a stock that has significant upside potential from current levels.
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