What Happened?

Shares of online payroll and human resource software provider Paycom (NYSE:PAYC) jumped 25% in the afternoon session after the company reported strong third-quarter earnings, which blew past analysts' EBITDA expectations.

Looking ahead, its full-year EBITDA guidance exceeded Wall Street's estimates. On the other hand, its gross margin declined, and its revenue guidance for the next quarter missed Wall Street's estimates. Overall, this quarter was mixed but still had some key positives.

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What The Market Is Telling Us

Paycom’s shares are not very volatile and have only had 6 moves greater than 5% over the last year. Moves this big are rare for Paycom and indicate this news significantly impacted the market’s perception of the business.

The biggest move we wrote about over the last year was 12 months ago when the stock dropped 24% on the news that the company reported third quarter revenue that fell short of Wall Street's expectations. In addition, its full-year revenue and adjusted EBITDA guidance, which are more important because markets are forward-looking, were below estimates.

The company attributed the weaker growth trend to cannibalization from Beti, its automated payment processing system. While it enhances efficiency, Beti has also led to lower billable services and reduced monetization opportunities.

On a positive note, its EPS and adjusted EBITDA beat analysts' expectations during the quarter.

Overall, it was a weaker quarter for the company. Following the results, multiple Wall Street analysts downgraded the stock, signaling that they think the worst may not be behind Paycom yet.

For example, Deutsche Bank analyst Bhavin Shah downgraded Paycom from Buy to Hold, adding, "Beti is leading customers to spend less on services and unscheduled payroll runs, which is negatively impacting monetization opportunities for Paycom."

Paycom is up 5.1% since the beginning of the year, but at $214.95 per share, it is still trading 12.3% below its 52-week high of $244.97 from October 2023. Investors who bought $1,000 worth of Paycom’s shares 5 years ago would now be looking at an investment worth $1,016.

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