Workday, Ceridian, Paylocity outperform as BMO says human capital software 'ready for next leg of growth'
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Workday (NASDAQ:WDAY), Ceridian (NYSE:CDAY) and Paylocity (NASDAQ:PCTY) were all listed outperform at BMO, as the investment firm said human capital software stocks were "ready for the next leg of growth."
Analyst Daniel Jester upgraded Workday and put a $295 price target on the stock, while he started coverage on Ceridian and Paylocity with an outperform rating and gave them a $92 and $230 price target, respectively. He noted that the human capital, or HCM, category is a "medium-term beneficiary" of many workforce trends after the COVID-19 pandemic and that should help build another leg of growth for both large corporations and small businesses over the next few years,
"Combined with employment growth and intense focus from corporate leaders on labor market tightness entering 2022, we see the HCM category as broadly benefiting from sturdy fundamentals," Jester wrote in a note to clients. "Within this favorable backdrop, we continue to see several years of opportunity for 'normalized' growth for the high- and mid-growth companies, and a path for upside in a growing market which we argue could be [more than] 2x larger than most estimates as the down-market matures and platform players continue to cross-sell innovation."
The analyst explained that there is enough of a total addressable market for most companies, and those with platforms will continue to expand into related and adjacent functionality to drive back sales. Investors should focus on payroll, recruiting and talent solutions as areas of upgrades.
Workday has a "solid" human capital core that is boosted by its financials, but Jester said "we see better momentum in the year ahead for the broader financial suite, especially in the mid-market."
Workday (WDAY) shares were up nearly 1% to $255.15 in early Tuesday trading.
Ceridian (CDAY) is likely to benefit from its Wallet, which is a "leader in 'on-demand pay," Jester explained, calling it a differentiator for hourly workforces. "International expansion, using some of the legacy strategic playbook, should be additive long term," Jester added.
Ceridian shares were flat in pre-market trading on Tuesday, at $75.82.
Paylocity (PCTY) has migrated through the volatility for small businesses well, Jester explained, but the company has benefited from the lower mid-market to add clients.
"Product extensions into collaboration tools are opening new avenues for growth over the long term," the analyst added.
Paylocity shares were slightly higher in pre-market trading on Tuesday, at $204.
Jester also started coverage on Paycom (NYSE:PAYC) and Paycor (NASDAQ:PYCR), giving both companies market perform ratings and a $335 price target and $26 price target, respectively.
Last month, Wells Fargo listed Workday (WDAY) as one of its top software picks for 2022, with the firm noting it is benefiting from companies looking to purchase complete packages of financial planning and workforce management software.