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Shares of Paycom (NYSE:PAYC) are the subject of particular attention following the publication of a short report by Kerrisdale Capital. The hedge fund also tweeted pull out a wire on Twitter (NYSE:TWTR) to support his position. On August 1, Kerrisdale will host a Twitter Spaces with a financial influencer @gurgavin to discuss his short position in PAYC shares.
Paycom has confirmed that it will release its second quarter results on August 2. However, Kerrisdale notes that the report could act as a negative catalyst. The firm points out that other negative catalysts likely to affect PAYC include slowing nonfarm payrolls reports and rising unemployment.
Kerrisdale thinks Paycom is operating an “ok biz”, but the company’s assessment is what inspired Kerrisdale to release the succinct report. Let’s get into the details.
PAYC Action: Kerrisdale Releases Brief Report
The short seller notes that PAYC is currently trading at 70x this year’s free cash flow consensus estimate (FCF). While other tech companies and beneficiaries of the pandemic have seen their valuations slashed, Kerrisdale believes there’s still “a lot of foam left in supposedly higher quality dishes.” Additionally, Paycom’s valuation does not reflect potential near-term headwinds, such as Total Addressable Market (TAM) saturation, growing competition and a slowing labor market.
Kerrisdale characterizes Paycom as a mature company that already owns a good portion of the small and medium-sized business (SME) payroll market. Therefore, further market share penetration may prove difficult and revenue and margin growth may be hampered. The hedge fund also accuses Paycom of using “aggressive accounting to inflate its EBITDA” by “playing games with deferred contract costs and capitalized R&D to hide accounting expenses.”
Meanwhile, the company’s competitors up their game. Automatic data processing (NASDAQ:ADP), human capital management (HCM) company, increased its customer retention rate and the payroll of its employees. Additionally, two startups in the same space have raised funds at valuations over $10 billion and are actively battling for market share.
Finally, Kerrisdale questions the company’s “ruthless” corporate culture. In the past, Paycom’s sales tactics have led to regulatory settlements, high sales rep turnover and poor customer service.
The hedge fund disclosed a short position in PAYC with a base price target of $185.
At the date of publication, Eddie Pan did not hold (neither directly nor indirectly) any position in the securities mentioned in this article. The opinions expressed in this article are those of the author, subject to InvestorPlace.com Publication guidelines.