Wall Street analysts have thousands of active price targets on companies across the S&P 500(SNPINDEX: ^GSPC), but those estimates can be aggregated into a single number. That bottom-up methodology gives the index a 12-month target level of 5,059, implying 10% upside from its current level.
In short, Wall Street says the S&P 500 is headed higher in 2024. But even if those gains fail to materialize, patient investors who buy good stocks at reasonable prices have historically been well rewarded. Alphabet(NASDAQ: GOOGL)(NASDAQ: GOOG) and Paycom Software(NYSE: PAYC) satisfy those conditions.
Both companies have clearly defined growth opportunities that make their current valuations look reasonable. And at less than $200 per share, the stocks are also relatively affordable. That makes Alphabet and Paycom no-brainer buys.
1. Alphabet
Alphabet provides ad tech solutions and cloud computing services. The company had a solid third quarter for the most part, beating estimates on the top and bottom lines. Sales increased 11% to $76.7 billion and GAAP net income climbed 42% to $19.7 billion. The only problem was slowing growth in Google Cloud, but that was likely a product of the challenging macroeconomic climate.
The investment thesis for Alphabet remains unchanged. Its strong presence in digital advertising and cloud computing -- two markets projected to grow at 14% annually through 2030 -- creates a path to low-double-digit revenue growth for the foreseeable future, with possible upside as the company leans into artificial intelligence (AI).
Alphabet accounted for nearly 30% of global digital ad revenue last year. That success stems from its somewhat unique ability to engage consumers and source data through its many popular platforms. The best known are Google Search, YouTube, and Android, but the company actually has six products that exceed 2 billion users.
Google Cloud accounted for 11% of cloud infrastructure and platform services spending in the third quarter. Alphabet's cloud subsidiary is still a distant third behind Amazon Web Services (32%) and Microsoft Azure (23%), but its market share has increased 4 percentage points in the last three years. That success is due, in part, to prowess in AI.
Alphabet is a major player in the cloud AI developer services market, and Forrester Research has recognized its leadership in AI infrastructure services. That puts the company in a good spot. AI spending is forecasted to increase at 37% annually through 2030, and Alphabet should be a major beneficiary. Indeed, Needham analyst Laura Martin believes Alphabet will surpass Apple in market capitalization as the AI boom unfolds.
Here’s the bottom line: Alphabet has a good shot at low-double-digit sales growth for years to come given its strong presence in digital advertising and cloud computing. That makes its current valuation of 6 times sales seem reasonable. Investors should feel comfortable buying a few shares of this growth stock today.
2. Paycom Software
Paycom provides cloud-based payroll and human capital management (HCM) software. The company published mixed financial results for the third quarter, missing expectations on the top line but beating on the bottom line. Sales climbed 22% to $406 million and generally accepted accounting principles (GAAP) net income climbed 44% to $75 million.
If the bad news had stopped there, shares may have slipped a few points. Unfortunately, guidance missed expectations by a mile and Paycom stock suffered its worst single-day decline in history. But the reason for the miss was somewhat unusual. In 2021, Paycom launched a first-of-its-kind payroll automation product called Beti (Better Employee Transaction Interface). That landed Paycom on Fast Company's list of the world’s most innovative companies in 2022.
Beti is working so well that clients are spending less on other services. CFO Craig Boelte explained: "Beti adoption and usage creates tremendous value to clients as they experience perfect payrolls and eliminate errors, corrections, and unscheduled payrolls, which would otherwise be billable items." So Beti is effectively cannibalizing sales, and management expects the problem to persist through next year.
Yet, Paycom’s ability to create value for clients should ultimately be a tailwind. Moreover, investors still have two reasons to be bullish, especially with shares trading at 6.6 times sales, a bargain compared to the three-year average of 18.4 times sales.
First, Paycom has grown nearly three times fasterthan the broader payroll and HCM software market over the last five years. That success can be ascribed to its platform strategy. Most organizations still rely on a patchwork of HCM point products, but Paycom integrates tools for hiring, training, payroll, scheduling, and human resources (HR) management on a single platform. That eliminates complex issues while it integrates and simplifies work for HR and accounting teams.
Second, Paycom launched Global HCM earlier this year, a product that makes its HCM software available in more than 180 countries. The company has also brought Beti to Canada and Mexico, and it plans to introduce its payroll software to more international markets in the future. The upshot of that expansion is that the company’s addressable market is getting bigger.
Here's the bottom line: Paycom is an innovative company with a track record for taking share in HCM and payroll software. But management says the international expansion has diluted its market share to less than 5%, meaning Paycom still has plenty of room to expand. To that end, Morningstar analyst Emma Williams expects sales to grow at 15% annually over the next five years. That makes its current valuation look cheap, creating a worthwhile buying opportunity for patient investors.
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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Trevor Jennewine has positions in Amazon and Paycom Software. The Motley Fool has positions in and recommends Alphabet, Amazon, Apple, Microsoft, and Paycom Software. The Motley Fool has a disclosure policy.
