Is ServiceNow a better investment than Paylocity Holding?

ServiceNow inventory (New York Stock Exchange: now) It has increased by approximately 117% in the last two years.On the other hand, companion Paylocity Holding stock (Nasdaq: PCTY) During the same period it rose by 156%. Although both companies provide cloud-based solutions, it is hard to believe that Paylocity Holding’s stock price is more than 1.3 times that of ServiceNow. Although ServiceNow’s revenue growth rate during 2017-2019 was 80%, Paylocity was only 56%. But will this fairytale rally on Paylocity Holding’s stock last? We don’t think so, and believe that ServiceNow may now be a stronger investment.

Our dashboardServiceNow and Paylocity Holding: Does the stock price trend make sense?‘, with basic figures.

Similar to revenue, ServiceNow’s profit margin (adjusted net revenue as a percentage of sales) is higher at 18.1%, while Paylocity Holding’s is 11.5%. In addition, in the past two years, the profit margins of both companies have increased positively. This further strengthens our argument that compared to ServiceNow, PCTY’s fundamentals cannot explain PCTY’s stock growth – based on PCTY’s P/E ratio, based on its current market price and FY19 earnings per share, its P/E ratio is 137 times. And ServiceNow is not 117 times higher.

How do the core businesses of ServiceNow and Paylocity Holding compare?

Let us take a closer look at the core business prospects. ServiceNow is a platform as a service (PaaS) provider that helps its customers automate IT business management. The company’s core business revolves around simplifying and automating workflows to manage “incidents, problems, and changes” in IT operational events. In addition, most of its revenue comes from subscription fees (95% in 2019). Due to the economic slowdown, companies are more focused on protecting income, ensuring viability and increasing productivity. This may benefit ServiceNow, because its enterprise workflow products may receive further attention. However, the risks faced by customers who have suffered large losses due to lock-in may cause some problems for their top line.

On the other hand, Paylocity Holding provides software-as-a-service (SaaS) solutions for payroll and human capital management for SMEs, and about 96% of its revenue comes from recurring expenses attributable to its cloud-based solutions. As cloud-based products continue to evolve in the ongoing crisis, we hope that the company will benefit from this trend due to its position in the niche market. On the other hand, the economic slowdown will cause considerable losses to enterprises and affect their ability to pay. Overall, despite the current crisis, PCTY may achieve positive revenue growth in fiscal 2020.

That is to say, although both ServiceNow and Paylocity Holding focus on cloud-based solutions, they seem to be inevitable, but there are huge differences in the scale of their operations, while ServiceNow is a behemoth among similar companies. In fact, compared with PCTY, it has a larger customer base, considerable transaction volume and outstanding revenue per user, which may drive higher revenue growth. This provides a promising bottom line for us to believe that ServiceNow and Paylocity Holding are undervalued.

To recap, we believe that ServiceNow’s stock (if not short-term) may exceed Paylocity Holding’s stock at least in the medium to long term.

Although ServiceNow has certain upside potential, which S&P 500 constituent stocks may exceed the benchmark index? We will beat the 5 stocks in the S&P 500 Index: TWTR, ISRG, NFLX, NOW and V look promising.

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