Paychex has had an impressive run over the past six months as its shares have beaten the S&P 500 by 6.6%. The stock now trades at $150.71, marking a 14.2% gain. This performance may have investors wondering how to approach the situation.
Is now the time to buy Paychex, or should you be careful about including it in your portfolio? Get the full stock story straight from our expert analysts, it’s free.
Despite the momentum, we're sitting this one out for now. Here are two reasons why we avoid PAYX and a stock we'd rather own.
Why Is Paychex Not Exciting?
One of the oldest service providers in the industry, Paychex (NASDAQ:PAYX) offers its customers payroll and HR software solutions.
1. Long-Term Revenue Growth Disappoints
A company’s long-term sales performance can indicate its overall quality. Any business can put up a good quarter or two, but many enduring ones grow for years. Regrettably, Paychex’s sales grew at a weak 7.4% compounded annual growth rate over the last three years. This was below our standard for the software sector.
2. 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 Paychex’s revenue to rise by 6.1%, close to its 7.4% annualized growth for the past three years. This projection doesn't excite us and implies its newer products and services will not accelerate its top-line performance yet.
Final Judgment
Paychex isn’t a terrible business, but it doesn’t pass our bar. With its shares outperforming the market lately, the stock trades at 9.6× forward price-to-sales (or $150.71 per share). This valuation tells us it’s a bit of a market darling with a lot of good news priced in - we think there are better stocks to buy right now. We’d suggest looking at one of our top software and edge computing picks.
Stocks We Like More Than Paychex
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