Best Performing Future of Work Companies in 2019

Last week, we published our Future of Work Global Index. The Future of Work Global Index is an index of 31 publicly-traded technology companies globally focused on delivering cloud solutions that address the changing workforce.

Over the last 5 years, the Future of Work Global Index is up over 365%; 6x better than the S&P 500 over that same period, and 4x better than the NASDAQ composite.

As we have started to dig further into the data, we have tried to diagnose the best performing companies. Last year, there were 3 standout performers in the Future of Work Global Index — Paycom, Paylocity, and Ceridian.

While the Future of Work Global Index rose an astounding 55% in 2019, the stocks of Paycom, Paylocity, and Ceridian rose 121%, 112%, and 107% respectively. We believe their unbelievable performance can be attributed to the combination of a few market-related factors, notably…

1. Low US unemployment means higher payroll and more people are getting paychecks
2. The companies’ target markets (SMB and mid-market) allow for greater volume and more predictability of BOTH top-line revenue growth and profitability
3. Management’s ability to over-achieve its financial performance and guidance (i.e.“beat and raise”) and delight investors
4. Ultimate Software departing the public markets and going private forced their investors to re-allocate their capital, potentially benefiting all 3 vendors that have competitive solutions

Even while retention is relatively strong for payroll incumbents such as ADP (90+%) and Paychex (82%), the churn is a $1 billion+ market opportunity annually, enabling more innovative vendors to grab market share.

Going into 2020, we believe stock performance will be increasingly correlated with the “Rule of 40.” There are multiple definitions for the “Rule of 40” but we define it as the combination of revenue growth with unlevered free cash flow (uFCF) margin. For example, if a company has 20% revenue growth and 20% unlevered free cash flow, they have achieved the Rule of 40.

When you start to look at recent stock appreciation with the 2020 “Rule of 40” estimates, investors are recognizing the increasing importance of revenue growth AND profitability. We believe this will build long-term sustainability of Future of Work companies while also opening the market to new innovation particularly with early-stage, venture-backed startups. As a student of the market, the Future of Work is bright!