If the story at Paycom Software (PAYC:NYSE) plays out as we hope, investors could be looking at the stock surging to $250 over the next 12 to 18 months, and perhaps as high as $475 over the coming years. But investors need to know this is not a low-risk opportunity.

Prominent payroll firm Paycom has taken an absolute hammering after reporting weaker-than-expected third quarter sales, lowering guidance, and admitting that its Beti product may be cannibalising other revenues.

Beti essentially automates payrolls by requiring employees to review, troubleshoot, and approve their pay checks, thereby reducing the need for time-consuming and costly after-the-fact corrections.

Effectively, 2024 earnings growth guidance has been cut from around 20% to around 12%.

The stock has lost about 25% since the early November bombshell, after recovering from $150 lows, and some investors have launched a class action lawsuit against Paycom management. A litigation overhang is never welcome but as far as we can tell similar class action suits in the US seem to have resulted in limited financial impact.

So why would investors go near this stock? Two big reasons. First, Paycom remains an innovative business that is still expanding with, before recent events, an almost unblemished record for meeting and beating market expectations. It is solidly profitable with barely 5% market share. 2024 guidance, we believe, has been set to beat.

Second, Paycom’s problems are internal, not macro, and crucially are fixable. In time, we would expect the company to innovate with new services and products to create new growth lines, but even in the short term, management still has a vast market opportunity to aim for as analysts estimate roughly half of all firms are still relying on spreadsheets and small, local and under-scale IT partners.

Jefferies analysts are confident issues will be corrected, and growth will return to previous rates down the line. They also highlight healthy new bookings and customer retention rates.

Morningstar analysts estimate compound average revenue growth at 15% annually over the next five years. It is on this basis that we calculate our previously mentioned $475 price assumption, and that’s factoring in a long-run price to earnings ratio of 25, about a 40% discount to the rating at the start of this year.

Operating margins have typically been running at 27% on average while returns on capital employed and equity are similarly high, at 24% and 26% since 2017. These could all drift in the short term as management gets to grips with its troubles but, we believe, patient investors should feel comfortable buying this growth stock today.

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