• If you are wondering whether Paycom Software's share price lines up with its true worth, the numbers offer plenty to think about before making any moves.
• The stock closed at US$123.91, with returns of 5.9% over the past 30 days, while the year to date return of 18.7% and 1 year return of 44.8% both point to a very different experience for longer term holders.
• Recent coverage has focused on Paycom Software's share price performance and how investors are reassessing expectations for the business. This helps explain the contrast between shorter and longer term returns. This context matters for valuation, because sentiment and fundamentals do not always move in the same direction at the same time.
• Simply Wall St's valuation model currently gives Paycom Software a value score of 5 out of 6. The next sections look at how different methods such as DCF and multiples compare, before finishing with a broader way to think about what that score really means for you.

Approach 1: Paycom Software Discounted Cash Flow (DCF) Analysis

A Discounted Cash Flow, or DCF, model takes estimates of a company’s future cash flows and discounts them back to today using a required return, giving an estimate of what the business might be worth now based on those projected cash flows.

For Paycom Software, the model used is a 2 Stage Free Cash Flow to Equity approach. The latest twelve month Free Cash Flow is about $434.9 million. Analysts provide cash flow estimates for several years ahead, and Simply Wall St extends those projections further. In this case, the ten year projections run from 2026 through 2035, with Free Cash Flow for 2030 projected at $698 million, all in US$ terms.

After discounting each of these annual cash flows and aggregating them, the DCF produces an estimated intrinsic value of about $348.68 per share. Compared with the recent share price of $123.91, this implies a discount of roughly 64.5%. On these assumptions, the shares are currently priced well below the model’s estimate of value.

Result: UNDERVALUED

Our Discounted Cash Flow (DCF) analysis suggests Paycom Software is undervalued by 64.5%. Track this in your watchlist or portfolio, or discover 53 more high quality undervalued stocks.

Approach 2: Paycom Software Price vs Earnings

For companies that are generating profits, the P/E ratio is a useful way to connect what you pay for each share with the earnings that support that price. It helps you see how many dollars of price the market is attaching to each dollar of current earnings.

What counts as a normal P/E depends a lot on how quickly earnings are expected to grow and how risky those earnings appear. Higher expected growth and lower perceived risk can justify a higher P/E, while slower growth or higher risk usually go with a lower multiple.

Paycom Software currently trades on a P/E of 12.72x. That is below both the Professional Services industry average P/E of about 18.84x and the peer average of 17.94x. Simply Wall St also calculates a Fair Ratio for Paycom Software of 18.34x. This is the P/E that might be expected given factors such as its earnings growth profile, industry, profit margins, market cap and specific risks.

The Fair Ratio is more tailored than a simple peer or industry comparison because it adjusts for company specific characteristics rather than assuming one size fits all. Comparing Paycom Software’s current P/E of 12.72x with the Fair Ratio of 18.34x suggests the shares are trading below that model based reference point.

Result: UNDERVALUED

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Upgrade Your Decision Making: Choose your Paycom Software Narrative

Earlier it was mentioned that there is an even better way to understand valuation. Narratives take that next step by letting you attach a clear story about Paycom Software to concrete assumptions for future revenue, earnings, margins and a fair value. You can then compare that Fair Value to the current price, all inside Simply Wall St’s Community page where Narratives are updated as new earnings or news arrives and where different views sit side by side. For example, there is one Paycom Narrative that uses a Fair Value of about US$260.61 with relatively higher revenue growth and a 20% profit margin. Another anchors on a Fair Value of roughly US$151.53 with revenue growing around 7.3% and a 22.2% margin. There is also a more optimistic view around US$250.00 with 9.0% revenue growth and a 24.6% margin. This makes it easier to see which story best fits your own expectations.

Do you think there's more to the story for Paycom Software? Head over to our Community to see what others are saying!

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.