Is This Why Paycom Software Inc. Is Dropping Today?

By Markets Fool.com

Image source: Getty Images.

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What happened

Shares ofPaycom Software(NYSE: PAYC), a tech companyfocused on payroll processing and other HR functions, are down by 16% at of 11:55 a.m. EDT on Wednesday after the company reported its third-quarter results.

So what

Given the huge drop, you would expect that Paycom had either whiffed on its quarterly report or issued disappointing guidance. However, neither looks to be the case.

Here's a look at the company's third-quarter results.

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Metric Q3 2016 Q3 2015 Change
Revenue $77.3 million $55.3 million 40%
Non-GAAP net income $9.0 million $4.7 million 68%
Non-GAAP earnings per share $0.15 $0.08 88%

Data source: Paycom Software.

Both revenue and non-GAAP (adjusted) EPS were up sharply during the third quarter, and they even managed to beat Wall Street's expectations.

As for forward guidance, management is providing a revenue range of $85 million to $87 million for next quarter, which represents growth of 32% at the midpoint. For comparison, analysts are currently expecting roughly $86 million in revenue for the period, so the company is right on target here, too.

While it is tough to identify the exact cause of the decline, my best guess is that some traders felt that the company's valuation had simply gotten ahead of itself. After all, shares of Paycom hadsoared more than 30% year to date, which pushed its trailing P/E ratio over 80. That likely causedsome traders to go into profit-taking mode on the stock on Wednesday.

Now what

Short-term price movements aside, Paycom's third-quarter results look quite good, suggesting that the company continues to wrestle away market share from legacy payroll processors like Paychex. Better still, 98% of the company's revenue is recurring, which positions it nicely for continued growth in the quarters ahead.

Overall, if you were bullish on Paycom's stock prior to today's drop -- as I am -- then I see no reason to change your stance today.

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Brian Feroldi has no position in any stocks mentioned.Like this article? Follow him onTwitter, where he goes by the handle@Longtermmindset, or connect with him on LinkedIn to see more articles like this.

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