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Paylocity latest cloud IPO to hit the heights

Aaron Pressman
The Exchange
Paylocity, a provider of payroll and benefits services over the Internet, went public on March 18, 2014, at $17 a share.

It’s an IPO. It’s a cloud services company. It’s not so overpriced. Surprise.

Benefits and payroll services provider Paylocity (PCTY) priced Tuesday night at $17 per share, $1 above its expected range, which valued the company at about $900 million. It quickly shot up to $28 in early trading Wednesday, pushing the valuation to about $1.5 billion.

With $91 million of revenue in calendar 2013 (and a modest net income of under $100,000), that values the company at only 15 times revenue. Compared to some of its cloud brethren, it’s a downright bargain.

Recall that last week healthcare cloud services provider Castlight Health (CSLT) priced at 107 times revenue and later jumped to 268 times. Yikes. Shares have since dropped 30%.

Among existing, similar companies to Paylocity, according to Yahoo Finance data, Workday (WDAY) trades at 39 times sales and Benefitfocus (BNFT) trades at 15. Old-school leader Automatic Data Processing (ADP), growing much more slowly, trades at just 3 times its $12 billion of revenue. And Paychex (PAYX) trades at 6 times its $2.4 billion.

The competitive cloud niche

The valuation no doubt reflects both the intensely competitive cloud niche and the less-than-sexy, block-and-tackle nature of the business. But Paylocity is growing quickly and steadily. Revenue grew 40% in the last half of 2013, 39% in fiscal 2013 and 40% in fiscal 2012.

The company targets modest-sized businesses those with 20 to 1,000 employees has almost 7,000 customers and claims a 92% annual revenue retention rate. The growth and retention rates suggest Paylocity knows how to execute.

Another less-than-sexy cloud IPO is expected to be priced after market close Wednesday. Q2 Holdings, which will trade under the ticker symbol QTWO, helps smaller regional and community banks provide their customers with online banking and mobile apps.

Underwriters expect to price the 7.8 million share deal at $11 to $13. That values the company at about $400 million at the midpoint of the range, or also less than 10 times revenue. Q2 had revenue of $57 million last year, up 38% from 2012, and a net loss of almost $18 million, more than double the red ink of the previous year.

Another cloud-related IPO, for trade services provider Amber Road, is expected to price Thursday at $10.50 to $12.50 per share (to trade as AMBR). That values the company at less than $500 million, again under 10 times last year’s revenue of $53 million. Revenue isn’t growing at the same high rates of other recent IPOs, up just 21% last year and 15% the year before. With its business so tied into the rate of global trade, however, growth could accelerate if and when the world economy gets back on track.

Bottom line, at least for this week: There’s little sign of a bubble in the overall technology sector, or even among all tech IPOs. But if there’s some cloud Internet angle, investors are still jumping.