Small and Medium Enterprises (SMEs) comprise the largest market share in the economies of almost all developed countries. Software and cloud platform developers are therefore trying to satisfy their specific needs. It’s no secret that the majority of owners of SMEs often have multiple job roles, acting as directors, accountants, and HR managers – all at the same time. For this reason, technological solutions that help to merge these functions are in great demand.

Justworks, Inc. – the company that created a cloud platform for management accounting – is planning to go public on 12 January 2022 by listing on the NASDAQ under the “JW” ticker symbol. Today, we’ll talk about the uniqueness of its product, and also discuss how interesting Justworks stock might be for investments.

Business of Justworks

Justworks, Inc. was founded in 2012 with headquarters in New York. The company is run by the founder, Isaac Oates. The average age of top management at Justworks is 24. The company currently employs 770 people. Its major product is a cloud platform that combines automated payments, payroll, HR administration, benefits enrollment, and government paperwork.

Justworks’ customers are small and medium businesses, which desperately need optimisation of both financial and time spending. In the US, the total number of employees in companies with fewer than 100 specialists is about 40 million. Most of these companies find it very difficult to compete with large corporations for a highly-qualified and skilled workforce. One of the platform’s optional features helps to choose the best benefit plan for an employee. Justworks offers its customers 24/7 tech support.

Features of Justworks platform

Justworks enables businesses to move away from hard-copy paperwork, and save time on management accounting. Over 8,000 companies from all the US have become the company’s loyal customers.

Justworks values

In 2021, the company received Gold and Silver medals at the Stevie® Awards for Sales & Customer Service in recognition of its excellent customer service. Moreover, Justworks is in the Top 3 of Selling Power's “50 Best Companies to Sell For”. In addition, according to Fortune Magazine and Great Place to Work®, Justworks was ranked first in the “Best Workplaces in NYC” rating.

The market and competitors of Justworks

According to the US Department of Labor, client bases in the foreseeable future will be dominated by Millennials and Zoomers who prefer to use digital solutions in business to avoid any third-party support services. According to Markets and Markets, the global HR platform market in 2020 amounted to $22.7 billion. By 2026, it is expected to reach $72.2 billion. As a result, the average annual growth rate could be 21%.

The company’s key competitors are:

  • TriNet, Inc.
  • Automatic Data Processing, Inc.
  • Paychex, Inc.
  • Insperity, Inc.
  • Paycom Software, Inc.
  • Paylocity Holding Corporation.
  • Paycor HCM, Inc.

Financial performance

Compared with its revenue, the company is not generating significant net profit, so we will focus on analysing its sales instead. According to the S-1 form, as of the end of May 2021, Justworks’ sales over the previous 12 months were $982.7 million, which indicates a 32.37% growth over the same period of 2020.

Justworks financial performance
Justworks financial performance

In a 3-month period ended on 31 August 2021, the company's sales were $291.2 million, a 40.81% increase in comparison with the similar period of 2020. As we can see, the revenue growth rate is going up and that's a very good sign for a growing business and a cornerstone of the company's market share growth in the future.

As of the end of May 2021, the company's gross profit over the previous 12 months was $106.1 million, a 73.1% increase if compared with the same period of 2020. In June-August 2021, the gross profit was $31 million, a 40.27% increase relative to the same period of 2020.

Cash and cash equivalents on the company's balance sheet are $191.7 million, while its debt is $131.7 million. The company demonstrates a high growth rate and has a low debt load.

Strong and weak sides of Justworks

It looks like the advantages of investing in Justworks are justified by the following:

  • High revenue and gross profit growth rate
  • Sound management by the founder
  • Flexibility in the company’s product offering to its customers
  • Cross-generational approach to consumer profiling
  • Awards received from the HR services industry

The risk factors of investing in Justwork's shares are the following:

  • Net profit is not stable
  • Strong competition
  • Dependency on the US market because the company is not transnational

IPO details and estimation of Justworks capitalisation

The underwriters of the IPO are William Blair & Company, L.L.C., Stifel, Nicolaus & Company, Incorporated, Raymond James & Associates, Inc., Piper Sandler & Co.; Robert W. Baird & Co. Incorporated, Siebert Williams Shank & Co., LLC, BofA Securities, Inc., J.P. Morgan Securities LLC, and Goldman Sachs & Co. LLC.

During the IPO, Justworks Inc. is planning to sell 7 million common shares at the price of $29-32 per share. The IPO volume will be $213.5 million and the company’s capitalisation may amount to $1.9 billion. Justworks may yet increase the IPO volume and the highest price of this range.

To assess loss-making companies, we use a multiplier – the Price-to-Sales ratio (P/S ratio). A P/S value for the technological sector with such a rapidly-growing target market could be 10.0 during the lock-up period. The company is filing for an IPO with a P/S equal to 1.96, and the upside for Justworks shares could be up to 510.2% (10/1.96*100%).

Bearing all these factors in mind, this investment may well be of a venture nature. Under favourable market circumstances, there is a strong possibility of an explosive surge in the company’s market capitalisation. Therefore, this issuer’s shares may be considered for short-term speculative investments.

Material is prepared by

Vadim has a higher education in finance and economics. He started becoming familiar with financial markets in 2012, and now specialises in analysing IPOs and portfolio investments.