What They Do
ADP is the leading provider of cloud-based human capital management (HCM) solutions, handling payroll, HR, benefits administration, and talent management for over 1 million clients worldwide. They serve everyone from small businesses with a few employees to Fortune 500 enterprises with tens of thousands of workers, making money through recurring software subscriptions and earning interest on client funds held during payroll processing. Essentially, ADP runs the back-office operations that keep America's workforce paid and managed.
Investment Thesis
**Dominant recurring revenue model** — 6% revenue growth driven by sticky client relationships and consistent demand for payroll/HR services that businesses can't easily eliminate**Margin expansion story** — Achieving 80 basis points of EBIT margin improvement while investing in AI and platform modernization, with 50-70 basis points annual expansion expected**Float income tailwind** — Earning $1.31-1.33B annually from client funds interest revenue, benefiting from higher interest rates on $30+ billion in client depositsKey Risks
**PEO growth deceleration** — Worksite employee growth slowed to just 2%, indicating potential market saturation in their higher-margin Professional Employer Organization business**Interest rate sensitivity** — Client funds revenue heavily dependent on interest rate environment, creating earnings volatility as rates fluctuateGrowth Story
ADP is delivering steady 6% revenue growth driven by new client wins across all segments and modest pricing increases, with international and enterprise segments showing the strongest momentum. The company's new Lyric HCM platform is gaining exceptional traction, capturing 70% of new business bookings and landing major enterprise deals exceeding 20,000 employees. Management raised full-year revenue guidance and expects this growth trajectory to continue as they expand AI capabilities and integrate recent acquisitions.
Profitability Profile
With a healthy 50.8% gross margin, ADP is demonstrating strong operating leverage as revenue growth translates to margin expansion. The company achieved 80 basis points of EBIT margin improvement in Q2 while investing heavily in technology modernization and AI capabilities. Their capital-light business model generates substantial free cash flow, and management expects continued 50-70 basis points of annual margin expansion as they scale their platform investments.
Competitive Position
ADP holds a commanding market position as the largest payroll processor in North America, competing primarily with Paychex in the SMB market and Workday in enterprise HCM. Their competitive moat stems from the mission-critical nature of payroll (switching costs are high), deep regulatory expertise across multiple jurisdictions, and the valuable data insights generated from processing millions of paychecks. The recent launch of AI-powered ADP Assist and successful Lyric platform rollout demonstrates their ability to innovate and defend market share.
Recent Momentum
ADP delivered another solid quarter with revenue and EPS beats across the board, marking four consecutive quarters of outperformance and driving management to raise full-year guidance for both revenue (6%) and EPS growth (9-10%). The standout was record-breaking client satisfaction scores and strong new business bookings, though PEO growth moderation created some concern. The company's AI initiatives and platform integration efforts are gaining real traction with enterprise clients.
What Wall Street Thinks
Analysts generally view ADP as a high-quality, defensive growth name with predictable cash flows and steady market share gains. The consensus expects continued mid-single-digit revenue growth with gradual margin expansion, though some debate exists around the sustainability of client funds interest income and competitive pressure in the SMB market. The consistent earnings beats have reinforced confidence in management's execution.
The Bottom Line
ADP is a cash-generating machine with a recession-resistant business model that's successfully modernizing its technology platform while maintaining pricing power and market leadership. The combination of steady 6% organic growth, margin expansion, and substantial float income makes it an attractive defensive growth play, though investors should monitor PEO trends and interest rate sensitivity.
