This Cloud Service Provider Could Deliver for Traders
Paylocity Holding Corporation (Nasdaq: PCTY)is a cloud-based provider of payroll and human capital management (HCM), software solutions for medium-sized organizations. The company’s services are provided in a software-as-a-service delivery model utilizing its cloud-based platform.
The cloud-based platform provides a suite of applications using a multi-tenant architecture. The cloud-based platform features a suite of unified payroll and HCM applications.
The company, through cloud-based platform, offers various products, which include Paylocity Web Pay, Core HR (Web HR), Talent Management, Time and Labor (Web Time and Web Expense), Benefits (Web Benefits), and Third-Party Administrative (TPA) Services.
The multi-tenant software platform is configurable and includes a unified suite of payroll and HCM applications, such as time and labor tracking, benefits and talent management.
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GlobeNewswire recently reported on earnings,
“Paylocity Holding … announced … financial results for the fourth quarter and full fiscal year 2019, which ended June 30, 2019.
“We had a great fiscal 2019, which included 26% revenue growth and 28.7% adjusted EBITDA margins, while also generating record free cash flow,” said Steve Beauchamp, Chief Executive Officer of Paylocity.
“I’m also pleased to announce the release of our Learning Management System, which helps us achieve our target PEPY of $400, and we are now setting our new target at $500 PEPY.”
Fourth Quarter Fiscal 2019 Financial Highlights
- Total revenue was $120.4 million, an increase of 25% from the fourth quarter of fiscal year 2018, as adjusted and as presented on a non-GAAP basis in the table below.
- Total recurring revenue was $116.7 million, representing 97% of total revenue and an increase of 26% from the fourth quarter of fiscal year 2018 total recurring revenue, as adjusted and as presented on a non-GAAP basis in the table below.
- Operating Income:
- GAAP operating income was $9.2 million and Non-GAAP operating income was $21.4 million in the fourth quarter of fiscal year 2019.
- Net Income:
- GAAP net income was $10.2 million or $0.18 per share for the three months ended June 30, 2019 based on 55.7 million diluted weighted average common shares outstanding.
Traders responded by buying.
The stock has been in a strong multiyear up trend and was recently consolidating gains.
A Trade for Short Term Bulls
As with the ownership of any stock, buying PCTY could require a significant amount of capital and exposes the investor to standard risks of owning a stock.
To reduce the risks of a trade, an investor could purchase a call option. This allows them to benefit from upside moves in the stock while limiting risk to the amount paid for the options. However, buying a call option can also require a significant amount of capital and includes the risk of a 100% loss.
Whenever an option is bought, the maximum risk is always equal to 100% of the amount of spent to purchase the option. Since options cost significantly less than a stock, the risk in dollar terms will usually be relatively small to own an option.
To further limit the risks of the trade, an investor could use a bull call spread. This strategy consists of buying one call option and selling another at a higher strike price to help pay for the cost of buying the first call. The spread strategy always reduces the risk of an options trade.
This strategy is designed to profit from a gain in the underlying stock’s price but has the benefit of avoiding the large up-front capital outlay and downside risk of outright stock ownership. The potential risks and rewards of this strategy are summarized in the chart below.
Source: The Options Industry Council
Both the potential profit and loss for the bull call spread are limited. The maximum loss is equal to the net premium paid when the trade is opened. The maximum profit is limited to the difference between the strike prices, less the debit paid to put on the position.
This strategy could be especially appealing with high priced stocks where the share price and options premiums are often a significant commitment of capital for smaller investors.
A Specific Trade for PCTY
Every day, we scan the markets looking for trades with low risk and high potential rewards. These trades are available almost every day and we share them with you as we find them. Now, it’s important to remember these are trading opportunities in volatile stocks.
When we find a potential opportunity, we evaluate it with real market data. But because the trades are volatile, the opportunities may differ by the time you read this. To help you evaluate the current opportunity, we show our math and explain the strategy.
For PCTY, the September 20 options allow a trader to gain exposure to the stock.
A September 20 $105 call option can be bought for about $4.10 and the September 20 $110 call could be sold for about $2.64. This trade would cost $1.46 to open, or $146 since each contract covers 100 shares of stock.
The amount paid to enter the trade is the largest possible loss on the trade. This is generally true whenever a trader is creating a debit to enter an options trade. “Creating a debit” means there is a cost to enter the trade. You could create a debit by simply buying puts or calls to open a directional trade.
In this trade, the maximum loss would be equal to the amount spent to open the trade, or $146.
The maximum gain on the trade is equal to the difference in exercise prices less the amount of the premium paid to open the trade.
For this trade in PCTY the maximum gain is $3.54 ($110 – $105 = $5; $5 – $1.46 = $3.54). This represents $354 per contract since each contract covers 100 shares.
Most brokers will require minimum trading capital equal to the risk on the trade, or $146 to open this trade.
That is a potential gain of about 142% based on the amount risked in the trade. The trade could be closed early if the maximum gain is realized before the options expire.