ADP
AUTOMATIC DATA PROCESSING INCNasdaqValuation snapshot
Above bull casePrice is above even the bull case.
Price as of Aug 17, 2026 · Valuation Aug 16, 2026
What drives ADP's base case?
base-case thesisADP grew revenue about 7% to $21.9 billion in fiscal 2026 and lifted profitability for the third straight year, helped by automation and by interest earned on the money it holds for clients. Management has told investors to expect 5-6% growth next year with further profitability gains, and this case takes them at their word. Record new-client signings of $2.2 billion and a 92% client retention rate keep the base compounding, so growth eases only slowly from there rather than falling off. Profit per dollar of sales keeps improving, but by smaller steps each year as the easy automation savings are captured and the lower-margin employee-benefits business grows alongside.
What shapes the assumptions
Company forecast of 5-6% revenue growth for fiscal 2027
guided consolidated revenue growth
Informs revenue growth
Record $2.2B of new client signings, up 6%
ES new business bookings
Raises revenue growth
Guided profitability gain of 70-90 basis points next year, after 80 last year
adjusted EBIT margin expansion
Raises operating margin
Capital spending of just $197M on $21.9B of revenue
capital expenditures as a share of revenue
Lowers reinvestment
Company-guided tax rate of about 23%
effective tax rate
Informs tax rate
Each driver links a business metric to the forecast assumption it shapes — the basis for this case, not investment advice.
Why the gap?
The market is pricing this as if revenue grows 10.1% a year. Over the last 5 years it grew 7.9% a year, so the price assumes about what it has delivered.
What else could explain it?›
- Or, holding growth steady
- the price is also consistent with a 36.5% operating margin, against the 29.5% assumed here.
- How confident is this estimate?
- Robustness 65.0/10 (Moderate) — some of any gap is our own uncertainty rather than disagreement.
- What would change the answer?
- Which assumption this valuation swings on, and by how much.
Many combinations of assumptions reproduce the same price. These are ways to read what the market might be expecting, not the market's actual view. How this is worked out
Research & assumptions
Inspect the valuation thesis, cases, risks, evidence, and model inputs.
View details
Research & assumptions
Inspect the valuation thesis, cases, risks, evidence, and model inputs.
Three independently researched cases generated automatically from published financials. Every assumption is justified and cited; the discount rate is computed from researched market inputs.
Base inputs from financials
source period →Base revenue (TTM)
$21.9B
Diluted shares
402,500,000
Net cash
-$734M
Bear
medium confidence$168.17
IV / share
-38.4% vs $272.96
- Explicit cash flows
- $41.38
- Terminal value
- $128.62
- Net cash
- -$1.82
- Intrinsic value / share
- $168.17
76.5% of the value rests on the terminal value — high dependency. A small change to terminal growth moves the valuation a lot — see terminal growth below.
Revenue growth4.5% → 3.5% → 3.0% → 2.8% → 2.7%medium
How derived: Starting from FY26 actual revenue of $21.95B (+6.7%) and management's FY27 guide of 5–6%, I take the low end and then decelerate below it because the two organic volume drivers ADP itself disclosed are already weak — pays per control grew only 1% in Q4 and client revenue retention is guided to fall 10–30bp from 92.1% — so a softening US employment cycle plus a fading float/interest tailwind pulls growth toward 3% by year five.
Why this confidence: Explicit FY2027 revenue guidance anchors year one ↑, Disclosed pays-per-control and retention deceleration supports the direction ↑, Five-year horizon spans an unknown employment cycle ↓, Float/interest income depends on rate path outside management control ↓
Evidence for
- ES pays per control grew only 1% in Q4 FY2026, and PEO average worksite employees rose just 2% to 775,000 — both volume engines are near stall speed.[ADP Q4 FY2026 earnings call transcript]· primary
- Management guides FY2027 client revenue retention to decline 10 to 30 basis points from FY2026's 92.1%, the first guided retention erosion in several years.[ADP FY26 Q4 8-K Exhibit 99]· primary
- FY2013 revenue fell 11.5% and FY2020–FY2021 growth slowed to 3.4% and 2.8%, showing ADP's top line is not immune to employment and portfolio shocks.[ADP reported annual revenue history (FY2009–FY2026)]· primary
Evidence against
- ADP booked a record $2.2B of Employer Services new business bookings in FY2026, up 6%, and guides FY2027 bookings up 4–7% — a forward revenue backlog inconsistent with sub-3% growth.[ADP Q4 FY2026 earnings call transcript]· primary
- Reported revenue has grown every year since FY2014, never below 2.8%, including 6.7% in FY2026.[ADP FY2026 Form 10-K]· primary
Operating margin27.5%medium
How derived: FY26 adjusted EBIT margin was 26.8%, and management guides 70–90bp of FY27 expansion, so I let the low end of that guide land at ~27.5% and then hold it flat because PEO margin already contracted 110bp in FY26 and slower revenue growth removes the operating leverage that produced the last three years of expansion.
Why this confidence: Company-issued basis-point margin guidance for year one ↑, Long reported history of margin expansion gives a clear trend line ↑, Assuming a full stall after FY2027 contradicts the recent trend ↓, Reported margin is a non-GAAP adjusted figure sensitive to charge classification ↓
Evidence for
- PEO segment margin contracted 110 basis points in fiscal 2026 even as consolidated margin expanded, showing one segment is already losing profitability.[ADP Q4 FY2026 earnings call transcript]· primary
- ADP took a $91M business alignment charge in Q4 FY2026, indicating margin gains are partly restructuring-driven rather than purely structural.[ADP Q4 and FY2026 earnings release]· primary
Evidence against
- Q4 FY2026 adjusted EBIT margin expanded 140 basis points to 25.1% and full-year margin expanded 80 basis points to 26.8%, an accelerating rather than fading trend.[ADP FY26 Q4 8-K Exhibit 99]· primary
- Management attributes margin gains to AI lowering call volumes and raising sales productivity — a structural cost lever that should persist.[ADP Q4 FY2026 earnings call transcript]· primary
Tax rate24.0%high
How derived: Management guides an effective tax rate of about 23% for FY2027 against a 21% US federal statutory rate, and I nudge it up to 24% in the bear case because a weaker profit mix shifts income toward higher-tax US state jurisdictions and reduces the stock-compensation windfall benefit that a falling share price would erode.
Why this confidence: Explicit company tax-rate guidance ↑, Tax rate has been stable and close to statutory for years ↑, Future US or foreign tax legislation is unknowable over five years ↓
Evidence for
- ADP's own FY2027 outlook specifies an effective tax rate of approximately 23%, a level it has held within a narrow band for several years.[ADP FY26 Q4 8-K Exhibit 99]· primary
Evidence against
- Guidance is 23%, so assuming 24% is above what the company itself expects and may overstate the drag.[ADP Q4 and FY2026 earnings release]· primary
Reinvestment rate18.0%medium
How derived: FY26 hard reinvestment was only $665M of capex plus capitalized intangibles (about 3% of revenue) against roughly $4.5B of after-tax operating profit, so the organic requirement is under 15% of NOPAT; I raise the bear figure to 18% because defending a decaying retention rate and buying growth through tuck-in acquisitions costs more per dollar of revenue added when organic demand is weak.
Why this confidence: Capex and intangible additions are disclosed line items ↑, Future acquisition spending is discretionary and unguided ↓, Reinvestment expressed as a share of profit requires my own NOPAT bridge ↓
Evidence for
- Retention guided down 10–30bp from 92.1% implies incremental spend just to hold the existing client base, raising the cost of each unit of growth.[ADP FY26 Q4 8-K Exhibit 99]· primary
- Additions to intangibles of $468.5M exceeded capital expenditures of $196.6M in FY2026, showing reinvestment increasingly runs through software and client-acquisition capitalization rather than property.[ADP FY2026 Form 10-K]· primary
Evidence against
- ADP converted $5.44B of operating cash flow into roughly $4.77B of free cash flow in FY2026, an asset-light profile that argues for a lower, not higher, reinvestment burden.[ADP FY2026 Form 10-K]· primary
- ADP returned about $2.08B in buybacks and $2.63B in dividends in FY2026, evidence management does not see high-return reinvestment needs absorbing its cash.[ADP FY2026 Form 10-K]· primary
Terminal growth2.0%medium
How derived: ADP's long-run revenue is US employment growth times wage inflation times price, and with pays per control running at only 1% the volume contribution is near zero, so I hold terminal growth at 2% — roughly long-run inflation alone and well below the 4.70% risk-free rate that caps any perpetual growth assumption.
Why this confidence: Anchored to a disclosed employment metric and the observable risk-free rate ↑, Perpetual assumptions are inherently unverifiable ↓
Evidence for
- Pays per control, ADP's direct measure of employment at its client base, grew only 1% in Q4 FY2026, implying almost no structural volume growth.[ADP Q4 FY2026 earnings call transcript]· primary
Evidence against
- Revenue compounded from $10.2B in FY2014 to $21.9B in FY2026, a rate far above 2%, driven by price and product attachment rather than headcount alone.[ADP FY2026 Form 10-K]· primary
Base
medium confidence$220.23
IV / share
-19.3% vs $272.96
- Explicit cash flows
- $48.80
- Terminal value
- $173.25
- Net cash
- -$1.82
- Intrinsic value / share
- $220.23
78.7% of the value rests on the terminal value — high dependency. A small change to terminal growth moves the valuation a lot — see terminal growth below.
Revenue growth5.5% → 5.3% → 5.1% → 4.9% → 4.7%high
How derived: I start at the 5.5% midpoint of management's explicit FY2027 revenue guide — itself a deliberate step down from FY2026's 6.7% — and then decay it only gently toward 4.7%, because the FY2026 record $2.2B bookings backlog and 92.1% retention keep the installed base compounding even as the interest-on-client-funds tailwind that added 14% growth in FY2026 normalizes.
Why this confidence: Year one sits at the midpoint of explicit company guidance ↑, Twelve consecutive years of positive, low-variance reported growth ↑, Recurring-revenue model with 92% retention makes the path predictable ↑, Years three through five extend beyond any company guidance ↓
Evidence for
- Management's FY2027 consolidated outlook is revenue growth of 5% to 6%, with Employer Services at 5–6% and PEO at 5–7%.[ADP FY26 Q4 8-K Exhibit 99]· primary
- Reported revenue growth has been remarkably stable in a 6–10% band since FY2022: 9.9%, 9.2%, 6.6%, 7.1%, 6.7%.[ADP FY2026 Form 10-K]· primary
- FY2026 ES new business bookings reached a record $2.2B, up 6%, with FY2027 bookings guided up 4–7%.[ADP Q4 FY2026 earnings call transcript]· primary
Evidence against
- FY2026 growth of 6.7% was 7% reported but only 6% on an organic constant-currency basis, so underlying momentum entering FY2027 is a point lower than the headline.[ADP FY26 Q4 8-K Exhibit 99]· primary
- PEO revenue excluding zero-margin pass-throughs is guided to grow only 3–5%, materially below the 5–7% headline PEO figure.[ADP FY26 Q4 8-K Exhibit 99]· primary
Operating margin29.5%high
How derived: FY26 adjusted EBIT margin was 26.8% after 80bp of expansion, and management guides another 70–90bp in FY2027 to roughly 27.6%; I extend that at a decaying pace of about 50, 40 and 30bp in the following years to reach 29.5%, since AI-driven service cost reduction is real but each incremental point of margin is harder and PEO pass-through revenue structurally dilutes the consolidated rate.
Why this confidence: Basis-point margin guidance issued directly by the company ↑, Multi-year record of consistent margin expansion ↑, Extrapolating expansion four years past guidance ↓
Evidence for
- FY2026 adjusted EBIT margin expanded 80bp to 26.8%, and Q4 expanded 140bp to 25.1%, with FY2027 guided for a further 70–90bp.[ADP FY26 Q4 8-K Exhibit 99]· primary
- Management cites AI reducing call volumes and improving sales productivity as a durable source of operating leverage.[ADP Q4 FY2026 earnings call transcript]· primary
Evidence against
- PEO margin contracted 110bp in FY2026, showing consolidated expansion is not uniform across segments.[ADP Q4 FY2026 earnings call transcript]· primary
- A $91M business alignment charge in Q4 FY2026 is excluded from the adjusted margin, so some of the reported expansion reflects restructuring costs held outside the metric.[ADP Q4 and FY2026 earnings release]· primary
Tax rate23.0%high
How derived: I use management's stated FY2027 effective tax rate of approximately 23% unchanged across the forecast, because it sits just above the 21% US federal statutory rate by the amount explained by state taxes on a predominantly domestic revenue base, and nothing in the disclosures suggests a mix shift that would move it.
Why this confidence: Explicit company guidance for the coming year ↑, Rate is close to statutory and historically stable ↑, Legislative risk over a five-year horizon ↓
Evidence for
- ADP's FY2027 outlook specifies an effective tax rate of approximately 23%.[ADP FY26 Q4 8-K Exhibit 99]· primary
- FY2026 net earnings rose 8% to $4.4B against adjusted EBIT of $5.9B, consistent with an effective rate in the low twenties.[ADP FY26 Q4 8-K Exhibit 99]· primary
Evidence against
- Guidance covers only fiscal 2027; applying it flat through fiscal 2031 assumes no change in US or international tax law over five years.[ADP FY2026 Form 10-K]· primary
Reinvestment rate15.0%medium
How derived: FY2026 capex of $196.6M and intangible additions of $468.5M together equal about 3% of revenue against roughly $4.5B of after-tax operating profit, so I set reinvestment at 15% of NOPAT — the disclosed hard spend plus a normal allowance for the tuck-in acquisitions and working capital that support mid-single-digit growth in an asset-light, high-return model.
Why this confidence: Capex, intangibles and cash flow are audited disclosed figures ↑, Acquisition spending is discretionary and not guided ↓, Converting disclosed spend into a NOPAT ratio requires my own estimate ↓
Evidence for
- FY2026 capital expenditures were $196.6M on $21.9B of revenue — under 1% — confirming an exceptionally asset-light model.[ADP FY2026 Form 10-K]· primary
- FY2026 operating cash flow of $5.44B converted to roughly $4.77B of free cash flow after capex and intangibles.[ADP FY2026 Form 10-K]· primary
Evidence against
- Additions to intangibles of $468.5M exceed capex by more than 2x, so the true reinvestment burden is understated by looking at capital expenditures alone.[ADP FY2026 Form 10-K]· primary
- Management's AI initiatives imply continued elevated product and technology investment not separately guided.[ADP Q4 FY2026 earnings call transcript]· primary
Terminal growth2.5%medium
How derived: In perpetuity ADP grows with US employment plus wage inflation plus modest pricing, and with pays per control at about 1% and long-run inflation near 2%, I settle at 2.5% — comfortably below the 4.70% risk-free rate, which is the ceiling for any sustainable perpetual growth rate.
Why this confidence: Tied to observable inflation and a disclosed employment metric ↑, Constrained below the observable risk-free rate ↑, Perpetual assumptions cannot be validated against any source ↓
Evidence for
- ADP's revenue base is overwhelmingly recurring payroll and HR services tied to client headcount and wages, so long-run growth tracks nominal employment costs.[ADP FY2026 Form 10-K]· primary
- The 10-year Treasury yield of about 4.70% sets an upper bound on a defensible perpetual growth assumption.[Federal Reserve H.15 Selected Interest Rates]· primary
Evidence against
- ADP has grown revenue at well above 2.5% for over a decade, reaching $21.9B in FY2026 from $10.2B in FY2014, so 2.5% may understate durable pricing and product attachment.[ADP FY2026 Form 10-K]· primary
Bull
medium confidence$270.01
IV / share
-1.1% vs $272.96
- Explicit cash flows
- $55.96
- Terminal value
- $215.87
- Net cash
- -$1.82
- Intrinsic value / share
- $270.01
79.9% of the value rests on the terminal value — high dependency. A small change to terminal growth moves the valuation a lot — see terminal growth below.
Revenue growth6.2% → 6.5% → 6.5% → 6.2% → 5.8%medium
How derived: I begin at the 6%-plus top end of management's FY2027 guide and then let growth reaccelerate to 6.5%, because ADP guided bookings up as much as 7% off a record $2.2B base and pays per control at only 1% means employment is at a cyclical trough — a labor-market recovery would restore the 2-3 points of volume that produced 9–10% growth in FY2022 and FY2023.
Why this confidence: Year one anchored to the top end of company guidance ↑, Historical precedent of 9%+ growth years supports the upside path ↑, Reacceleration assumes a labor-market recovery the company has not forecast ↓, Contradicted by guided retention decline ↓
Evidence for
- ADP delivered 9.9% and 9.2% revenue growth in FY2022 and FY2023, proving the model can grow far above 6% when employment and pricing are favorable.[ADP FY2026 Form 10-K]· primary
- FY2027 ES new business bookings are guided up 4–7% on top of a record $2.2B FY2026 base.[ADP Q4 FY2026 earnings call transcript]· primary
- Interest earned on funds held for clients rose 14% to about $1.35B in FY2026 with FY2027 client-funds contribution guided higher again, adding a high-margin growth layer.[ADP FY26 Q4 8-K Exhibit 99]· primary
Evidence against
- Management's own FY2027 consolidated guide tops out at 6%, so growth above that requires exceeding company expectations.[ADP FY26 Q4 8-K Exhibit 99]· primary
- Client revenue retention is guided to fall 10–30bp from 92.1%, a headwind to reacceleration.[ADP FY26 Q4 8-K Exhibit 99]· primary
Operating margin31.5%medium
How derived: FY2026 exited with Q4 adjusted EBIT margin expanding 140bp and full-year margin at 26.8%, and with FY2027 guided up another 70–90bp, I compound roughly 90–100bp per year on AI-driven service and sales productivity plus the operating leverage from faster revenue, reaching 31.5% — an aggressive but arithmetically achievable extension of the exit-rate trend.
Why this confidence: Grounded in a disclosed Q4 exit-rate margin expansion of 140bp ↑, Sustaining ~100bp per year for five years exceeds guidance ↓, PEO pass-through mix works structurally against the assumption ↓
Evidence for
- Q4 FY2026 adjusted EBIT margin expanded 140 basis points to 25.1%, an exit rate well above the 80bp full-year pace.[ADP FY26 Q4 8-K Exhibit 99]· primary
- Adjusted diluted EPS grew 17% in Q4 and adjusted EBIT grew 10% for the year on 7% revenue growth, demonstrating live operating leverage.[ADP FY26 Q4 8-K Exhibit 99]· primary
- Management identifies AI as reducing call volumes and improving sales productivity across the cost base.[ADP Q4 FY2026 earnings call transcript]· primary
Evidence against
- PEO segment margin contracted 110bp in FY2026 and PEO revenue includes zero-margin benefits pass-throughs that mechanically dilute consolidated margin as they grow.[ADP FY26 Q4 8-K Exhibit 99]· primary
- Company guidance calls for 70–90bp of expansion in FY2027, below the ~100bp annual pace this case assumes thereafter.[ADP Q4 and FY2026 earnings release]· primary
Tax rate22.5%high
How derived: Management guides approximately 23% for FY2027, and I shade it to 22.5% because faster earnings and a rising share price enlarge the excess tax benefit on stock-based compensation, which is the recurring item that has historically pulled ADP's effective rate below its statutory-plus-state baseline.
Why this confidence: Explicit company tax guidance for fiscal 2027 ↑, Deviation from guidance is small (50bp) ↑, Stock-compensation benefit is inherently volatile ↓
Evidence for
- ADP guides a FY2027 effective tax rate of approximately 23%, only ~2 points above the 21% US federal statutory rate.[ADP FY26 Q4 8-K Exhibit 99]· primary
Evidence against
- The company itself expects 23%, not 22.5%; stock-compensation windfalls are volatile and not guided.[ADP FY2026 Form 10-K]· primary
Reinvestment rate12.0%medium
How derived: FY2026 capex was $196.6M on $21.9B of revenue — under 1% — and total hard reinvestment including $468.5M of intangibles was about 3% of revenue, so at ADP's very high return on capital the growth in this case requires only about 12% of after-tax operating profit, with AI-enabled implementation and service reducing the incremental cost of adding each new client.
Why this confidence: Disclosed capex and cash flow directly support a low reinvestment burden ↑, Pairing higher growth with lower reinvestment assumes improving capital efficiency ↓, Acquisition spending over five years is unguided ↓
Evidence for
- FY2026 operating cash flow of $5.44B versus capex of $196.6M implies a business that converts nearly all profit to cash without heavy capital needs.[ADP FY2026 Form 10-K]· primary
- ADP returned roughly $4.7B to shareholders via buybacks and dividends in FY2026, confirming reinvestment needs consume only a small share of cash generation.[ADP FY2026 Form 10-K]· primary
- Management says AI is improving sales productivity and reducing call volumes, lowering the cost of servicing and winning clients.[ADP Q4 FY2026 earnings call transcript]· primary
Evidence against
- Assuming faster growth on lower reinvestment implies rising returns on capital, which is the most demanding combination in the model.[ADP FY2026 Form 10-K]· primary
- Additions to intangibles of $468.5M more than doubled capex, and AI product build-out could push this line higher.[ADP FY2026 Form 10-K]· primary
Terminal growth2.8%medium
How derived: Long-run growth equals wage inflation plus employment growth plus pricing and product attachment, and given ADP has compounded revenue from $10.2B in FY2014 to $21.9B in FY2026 largely through per-client product expansion, I allow 2.8% — above inflation but still well inside the 4.70% risk-free ceiling.
Why this confidence: Bounded below the observable risk-free rate ↑, Supported by a twelve-year record of above-inflation compounding ↑, Contradicted by the current near-zero employment growth reading ↓
Evidence for
- ADP more than doubled revenue between FY2014 ($10.2B) and FY2026 ($21.9B) with no year of decline, evidencing durable pricing and cross-sell power.[ADP FY2026 Form 10-K]· primary
- 2.8% remains far below the 4.70% 10-year Treasury yield, keeping the assumption internally consistent.[Federal Reserve H.15 Selected Interest Rates]· primary
Evidence against
- Pays per control grew only 1% in Q4 FY2026, meaning the employment component of long-run growth is currently near zero.[ADP Q4 FY2026 earnings call transcript]· primary
Valuation robustness
reliability of the estimate, not a stock rating65 / 100 · Moderate
Formula v1.0.0. Higher means a more reliable estimate — not a recommendation.
Quality checks
Automated model-risk flags — warnings, not recommendations.
- 79% of the intrinsic value rests on the terminal value — a small change to terminal growth moves the valuation a lot.→ terminal growth
Per-share economics
Business growth after changes in the diluted share count.
| Period | Revenue growth | FCF/share | FCF/share growth | Shares | Share growth |
|---|---|---|---|---|---|
| Q1 2025 | 7.1% | — | — | 409.5M | -1.0% |
| Q2 2025 | 8.1% | — | — | 409M | -0.8% |
| Q3 2025 | 5.7% | — | — | 408.5M | -0.9% |
| Q1 2026 | 7.1% | — | — | 406.5M | -0.7% |
| Q2 2026 | 6.2% | — | — | 404.7M | -1.1% |
| Q3 2026 | 7.0% | — | — | 402.5M | -1.5% |
Valuation history every run
History builds as the valuation is recalculated — this is the first recorded run.
Market inputs researched
The 10-year US Treasury constant maturity yield stood at about 4.70% on August 14, 2026, and I use it directly as the risk-free rate because it is the standard maturity-matched discounting benchmark for a US-dollar long-horizon DCF.
ADP's reported market beta is 0.81, consistent with a recurring-revenue payroll processor whose fee base is far less cyclical than the market; I use it unadjusted since ADP's net debt is negligible (about $4.96B debt against $4.23B cash), so levered and unlevered beta are nearly identical.
Damodaran's implied equity risk premium for US equities was 4.23% over the Treasury bond rate at the start of 2026, and I use that forward-looking implied figure rather than a historical average because it is derived from current index levels and expected cash flows.
ADP last traded at $269.20 with an intraday range of $265.90 to $271.03, and I use the last close as the market reference price against which the DCF's per-share value is compared.
Generated 8/16/2026, 11:14:36 AM · pipeline v1.1.0