Why Paycom Software Stock Rocketed 25.5% Higher in October

Shares of Paycom Software (NYSE: PAYC) jumped 25.5% in October, according to data from S&P Global Market Intelligence. The web-based HR and payroll management provider accelerated revenue growth in the third quarter as it continues to automate workloads for back-office functions. After collapsing earlier this summer, Paycom shares have shot up over 45% in recent months as investors get enthusiastic about the long-term software winner again.

Here's why shares of Paycom Software rebounded this month.

Revenue growth rebound

On Oct. 30 -- near the end of the month -- Paycom reported earnings for the third quarter of 2024. Revenue grew 11.2% year over year to $451.9 million, while net income was flat at $73.3 million for the period. This was a revenue growth acceleration from last quarter, when sales growth slowed down to just 9% year over year.

Many investors feared a big revenue slowdown for Paycom Software. The company historically grew sales at a healthy double-digit rate, with growth at around 30% just a few years ago. This quarter showed the first reversal of this slowdown, which investors took as a positive sign.

Management says the company is doing well with its cloud-based automation software that saves a ton of time for payroll and HR workers at companies. It is also now paying a quarterly dividend that yields close to 1% and repurchasing stock as another way to return cash to shareholders. As a profitable company, Paycom's cash flow has consistently grown in the last few years, hitting over $300 million in the last 12 months.

What should investors do now?

Paycom's business is recovering, which is why the stock is soaring to new heights. However, now it does trade at a more expensive earnings multiple. Compared to its current market cap of $12.3 billion, shares are trading at a price-to-free cash flow (P/FCF) of 41. That is significantly higher than the average for the S&P 500, which shows that investors have flipped from being pessimistic to optimistic about Paycom stock.

This doesn't necessarily mean investors should sell their shares today. In the last five years, Paycom's free cash flow has grown by a cumulative 132%, and its revenue has risen by a cumulative 147%. If this growth continues, Paycom's free cash flow multiple will come down, and its stock will likely rise. Don't sell this one as long as revenue and free cash flow keep climbing higher over the long term.

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Brett Schafer has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Paycom Software. The Motley Fool has a disclosure policy.