Paycom Software, Inc.PAYCNYSE

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DCF Valuation

DCF Valuation Summary

Strong Buy

Fair Value: $346.85 per share(market-calibrated)

+163.1%

Upside to Fair Value

Current

$131.81

Pure Model

$368.84

Fair Value

$346.85

Bull Case

$468.73

Bear Case

$287.59

Market Reality Check

Model Terminal Growth

3.75%

Market-Implied Growth

0.50%

Calibrated Growth

2.61%

Fair value uses 65% model / 35% market-implied terminal growth. Pure model: $368.84.

What's Driving This Ratingfor PAYC

↓

CapEx normalizing toward maintenance

Historical CapEx is 9.00% of revenue (heavy investment phase). Model fades this to 6.00% by Year 10, freeing up ~$102M in annual FCF. This is the biggest driver of long-term cash flow improvement.

✓

Premium margins already priced in

EBIT margin of 38.78% is already well above sector average. The model holds this level — there's limited room for margin expansion to drive upside. Valuation depends primarily on revenue growth.

→

Moderate revenue growth

Analyst consensus projects 6.63% revenue growth, fading to 3.75% by Year 10. Revenue reaches $3.4B (vs $2.1B today).

↔

Perpetuity and exit methods disagree

Perpetuity growth gives $290.59/share (24.8x terminal FCF) while exit multiple gives $447.10/share (44.3x terminal FCF). The 28x EV/EBITDA exit reflects current market multiples, while the perpetuity method with 3.75% growth is more conservative. The base case averages both methods.

🎯

Market pricing in lower growth than model

The market implies only 0.50% perpetual growth — 325bps below the model's 3.75%. This suggests the market sees headwinds or risks not in the model.

✓

Strong cash flow conversion

Year 10 FCF/EBITDA conversion of 63.16% indicates efficient cash generation. FCF reaches $958M by Year 10 (28.16% FCF margin).

Weighted Average Cost of Capital (WACC)

Cost of Equity (CAPM)

Risk-Free Rate (Rf)4.50%

Beta (β)0.80

Market Risk Premium4.50%

*Using current implied premium (4.5% per Damodaran 2026), not historical (6.5%)

Cost of Equity (Re)8.08%

Cost of Debt

Pre-tax Cost of Debt1.47%

Tax Rate26.80%

After-tax Cost of Debt1.08%

Equity Weight (E/V)97.97%

Debt Weight (D/V)2.03%

WACC Calculation

WACC = (E/V × Re) + (D/V × Rd × (1-Tc))

WACC = (97.97% × 8.08%) + (2.03% × 1.08%)

= 7.94%

10-Year Free Cash Flow Projections(showing years 1, 3, 5, 7, 10)

Year	Year 1	Year 3	Year 5	Year 7	Year 10
Revenue	$2.2B	$2.6B	$2.8B	$3.0B	$3.4B
EBIT	$848M	$994M	$1.1B	$1.2B	$1.3B
Tax	$227M	$266M	$294M	$317M	$354M
NOPAT	$621M	$728M	$803M	$865M	$966M
+ Depreciation	$127M	$149M	$164M	$177M	$198M
- Capex	$197M	$214M	$217M	$213M	$204M
- Δ NWC	$1M	$2M	$890,935.263	$959,008.285	$1M
Free Cash Flow	$550M	$661M	$750M	$828M	$958M
Discount Factor	0.926	0.795	0.682	0.586	0.466
Present Value	$509M	$526M	$512M	$485M	$446M

FCF Formula: Free Cash Flow = NOPAT + Depreciation - Capex - Change in Net Working Capital

Terminal Value Calculation

Perpetuity Growth Method

Year 10 FCF$958M

Terminal Growth Rate3.75%

WACC7.94%

TV = FCF₁₀ × (1+g) / (WACC-g)

Terminal Value$23.7B

PV of Terminal Value$11.1B

Exit Multiple Method

Year 10 EBITDA$1.5B

Exit Multiple (EV/EBITDA)28.0x

TV = EBITDA₁₀ × Exit Multiple

Terminal Value$42.5B

PV of Terminal Value$19.8B

Valuation Summary

Perpetuity Growth Method

PV of Projected FCFs$4.9B

PV of Terminal Value$11.1B

Enterprise Value$16.0B

(-) Net Debt-$218M

Equity Value$16.2B

Shares Outstanding56M

Price per Share$290.59

Exit Multiple Method

PV of Projected FCFs$4.9B

PV of Terminal Value$19.8B

Enterprise Value$24.7B

(-) Net Debt-$218M

Equity Value$24.9B

Shares Outstanding56M

Price per Share$447.10

Pure Model Fair Value

$368.84

Average of perpetuity growth and exit multiple methods (before market calibration)

Sensitivity AnalysisPrice per Share

WACC ↓ / Growth →	2.75%	3.25%	3.75%	4.25%	4.75%
5.94%	$471.08	$500.84	$544.20	$552.14	$530.10
6.94%	$399.32	$414.50	$434.44	$461.79	$501.63
7.94%	$348.99	$357.86	$368.84	$382.80	$401.14
8.94%	$310.49	$316.13	$322.85	$331.02	$341.13
9.94%	$279.45	$283.25	$287.67	$292.86	$299.06

How to read: This table shows how the valuation changes with different WACC (discount rate) and terminal growth rate assumptions. Green = undervalued, Red = overvalued.

Scenario Analysis

Bear Case

$287.59

118.2% vs current

• -25% vs analyst consensus
• Terminal growth: 3.3%
• Beta: 1.00

Base Case

$368.84

179.8% vs current

• Analyst consensus
• Terminal growth: 3.8%
• Beta: 0.80

Bull Case

$468.73

255.6% vs current

• +25% vs analyst consensus
• Terminal growth: 4.3%
• Beta: 0.68

Key Assumptions & Drivers• Technology Sector

Growth Assumptions (Select Years)

Year 1 Revenue Growth6.63%

Year 3 Revenue Growth9.11%

Year 5 Revenue Growth3.75%

Year 7 Revenue Growth3.75%

Year 10 Revenue Growth3.75%

Terminal Growth Rate3.75%

Margin & Efficiency

Current EBIT Margin38.78%

Tax Rate26.80%

Historical Capex / Rev9.00%

Terminal Capex / Rev6.00%

NWC / Revenue0.87%

Key Drivers: Revenue growth, operating margin expansion, capex efficiency, and working capital management are the primary drivers of cash flow generation. Terminal value assumptions significantly impact final valuation.

Institutional-Grade Methodology

Actual Company Data: Revenue, EBIT, Capex, NWC, Tax Rate, Interest Expense, Beta

Market Assumptions: Risk-free: 4.5% (10Y), MRP: 4.5% (Damodaran 2026), Exit: 28x EV/EBITDA (Technology sector)

This DCF model is for informational purposes only. Projections are based on assumptions that may not materialize. Past performance does not guarantee future results. Consult a financial advisor before making investment decisions.

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