Cloud software vendor Paycom beats rival Workday into the S&P 500 because of one key metric: profit

Key Points
  • Paycom was founded in 1998 and has been profitable since it went public in 2014, while larger rival Workday is losing over $100 million a quarter.
  • The company's stock more than doubled in 2019, far outpacing the S&P 500.
Chad Richison, CEO, Paycom
Scott Mlyn | CNBC

Paycom, a provider of cloud-based payroll software, was added to the S&P 500 on Wednesday after the company's stock price more than doubled over the past year, lifting its market value to almost $18 billion. The shares rose more than 5% in extended trading following the announcement.

The addition comes two months after cloud vendor ServiceNow joined the index and is the latest sign of the increased significance of subscription software in the broader economy. Prior to last year, Salesforce was the only modern cloud company in the S&P 500, alongside older names like Adobe and Autodesk, which have transitioned to the new model over the last decade.

Paycom, which was founded in 1998 in Oklahoma City and debuted on the stock market in 2014, beat rival Workday into the benchmark index even though it has less than half the market cap and one-fifth the revenue. That's because S&P Dow Jones Indices requires that a company show a year of profitability before it can be added to the broader S&P Composite 1500.

While Paycom generated net income of over $160 million in the past four quarters, Workday has lost more than $100 million a quarter for the past five periods. Shopify, a cloud-based provider of e-commerce software, is valued at almost $54 billion, but has yet to turn a profit and thus can't join the index. The minimum market cap required for entry into the S&P 500 is $8.2 billion.

Paycom will replace WellCare Health Plans, which is being acquired by Centene, in the index before trading starts on January 28. In addition to Workday, Paycom also competes with Cornerstone OnDemand and Ceridian.

Paycom shares rose 1.2% in regular trading on Wednesday to a record high of $303.28 before extending its rally after hours. Their 116% increase in 2019 far surpassed the S&P 500's gain of almost 29%.

Chad Richison, Paycom's founder and CEO, is the largest shareholder, with stock worth $2.5 billion.

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