The company had been on my radar for months and I decided to jump in when they gave FY22 ARR Guidance of $37M.

The stock’s been sliding downwards since listing in 2018 from dilution and margins that are not as interesting as other pure Saas players. This is because they are mainly a Payroll Outsourcing (70% of revenues) rather than HCM (30% of revenues). This is exemplified in how a business like intelliHR is valued (~20X sales) vs Paygroup (~ 1.7X sales). So expectations must be aligned to their operating model, but I believe there is room for improvement in their margins as they continue to grow markets and customers. The biggest player in the industry is ADP, a mammoth 100B company that is value at ~6X sales with a PE ~30. 

Paygroup’s growth (both organic and with acquisitions) has been very impressive. $7M in ARR in 2017 at time of listing and they gave guidance of $37M for FY22. Currently on MC of $44M, and P/S ratio of 1.6, seems very cheap for such growth. 

In my view the biggest risk is that they remain in this “so close” category where they continue to grow the top line, but they dilute too much and bottom line doesn’t change enough. If that happens investors might never see the value in the company. 

I think this risk is mitigated by an impressive leadership team that are nearly all ex-ADP. I’ve seen the CEO and the Chief Sales Officer present 3 times now and like their style. They seem like great operators and I’m banking on them to make it happen. 

It’s been referenced here before, Andy Crebar has done a quality deep dive in the company. Link: https://www.andycrebar.com/p/paygroup-deep-dive