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Investing.com -- TD Cowen upgraded Paycom Software to Buy from Hold, saying the company is past a transition period and has room to grow faster than expected while improving profitability.
The brokerage said it now expects Paycom to sustain double-digit revenue growth and expand free cash flow margins by several percentage points over the next two years as upfront spending on artificial intelligence rolls off.
"We expect the shares to outperform as investors gain comfort on the capex outlook & as it continues to deliver beat & raise performance," analysts said.
That should give the company a path to exceed Wall Street forecasts and support a higher valuation.
TD Cowen pointed to survey results showing strong customer satisfaction and retention for Paycom, ranking among the top in its coverage of human capital management software providers.
It set a price target of $258, implying the shares should trade more in line with rival Paylocity.
The analysts said most brokerages remain cautious on Paycom, with more than 80% of ratings at Hold, but they see scope for the stock to outperform as investors gain confidence in its spending plans and consistent performance.
“We upgrade PAYC to Buy as we now have increasing conviction on it sustaining doubledigit growth & materially expanding FCF margins over the medium term, positioning it to deliver upside to consensus estimates and warranting multiple expansion,” analysts at TD said.