Automatic Data Processing (ADP), a well-known provider of payroll and human resources software, is experiencing some turbulence in the stock market despite its solid business fundamentals. The company’s shares have dropped approximately 23% from their 52-week high, prompting investors to reassess the stock’s attractiveness.
ADP has long been viewed as a “boring” yet highly valuable company, often trading at a premium due to its business model, which focuses on sticky, recurring revenue tied to one of corporate America’s essential functions—payroll processing. Nonetheless, this recent decline raises questions about whether the stock has lost its luster among investors or if it presents a more reasonable entry point for those looking to invest in a long-term growth story.
Examining ADP’s recent earnings report for the first quarter of fiscal 2026, which ended on September 30, 2025, reveals that the company continues to show steady growth. Revenue increased by 7% year over year to $5.2 billion, while earnings per share rose by 6% to $2.49. Furthermore, non-GAAP earnings per share climbed by 7% year over year, indicating that the company’s core business remains resilient.
However, a troubling trend is emerging beneath the surface. The “pays per control” metric, which serves as an indicator of the number of employees on ADP’s payrolls in the U.S., has plateaued. For the first quarter, pays per control was essentially unchanged year over year, marking a decline from the 1% growth seen in the previous two quarters. Such stagnation in a key metric could lead investors to question the long-term sustainability of ADP’s growth and challenge its premium stock valuation.
Looking ahead, ADP has guided for fiscal 2026 to see U.S. pays per control remain “approximately” flat, as well as a slight deceleration in overall revenue growth, estimated between 5% and 6% compared to fiscal 2024.
In response to these challenges, ADP aims to diversify its growth strategy by evolving into a more comprehensive human capital management (HCM) platform. New initiatives like ADP Workforce Now NextGen—a redesigned version of a key product for the midmarket segment—and ADP Lyric HCM, a next-generation platform aimed at larger clients, are expected to attract new customers and deepen relationships with existing ones. This strategic shift indicates that even in a slower pays-per-control environment, ADP has avenues for growth.
Despite these positive initiatives, the valuation of ADP’s stock is still a topic of concern. Despite its recent pullback, shares currently trade at a price-to-earnings ratio of 25, with a forward price-to-earnings ratio of 23. While this isn’t extraordinarily high for a software-as-a-service company poised for continued growth, some analysts suggest that the valuation may be excessive given the slow growth in the pays per control metric. This dependency on expanding service offerings could heighten the risks associated with future earnings-per-share growth, potentially leading investors to reevaluate their willingness to pay a premium for the stock.
For now, caution seems to be the prevailing sentiment. Some investors express intentions to remain on the sidelines unless the stock’s price-to-earnings ratio approaches 20, at which point a reassessment could occur. As the market continues to scrutinize ADP’s performance and growth prospects, its next moves will be closely watched by both current and potential investors.
