šŸ“®The Sunday Newsletter archive

Justworks IPO

Justworks ($JW) is the first promising IPO of the year. The company helps small and midsized businesses (SMBs) avoid all the complex aspects of having a workforce. It lets themĀ outsource payroll, HR, benefits, and compliance. JW operates as a PEO (Professional Employer Organization), which means that it essentially leases employees to companies, reducing costs for the employer in the process.Ā 

While there are hundreds of PEOs in the U.S. Justwork’s modern, cloud-based solutionsĀ just work, and its performance confirms that. The company was founded in 2012 and already manages 140,000 employees for 8,000 employers. Also, its net promoter score (NPS) of 58 is significantly higher than the historicalĀ averageĀ NPS of around 8Ā for the HR services industry. This is a strong sign that Justworks provides high-quality services.

The company makes money from subscriptions per employee and from fees for managing employee benefits. In the most recent quarter,Ā revenue jumped 41% y/y to $291 million, acceleratingĀ from the 32.4% growth in the fiscal year ended May 31. It also boasts a strong net retention rate (NRR) of 117%. That’s because JW grows when its customers grow and hire more employees.

Despite its fast growth, the company’sĀ already at a breakeven level. Over the past two years, its operating margin has fluctuated between -2.9% and 1.3%, so it can easily become solidly profitable in the near future.

šŸ“«Originally posted as part of the Sunday Latte
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No one starts a business to focus on payroll, benefits, and compliance. These are issues entrepreneurs would love to never deal with šŸ™…ā€ā™‚ļø. That’s why PEOs exist. By outsourcing Human Capital Management to other companies, small businesses can spend their time on things that matter. Yet, traditional PEO firms lack pricing transparency and are not built for the age of cloud.Ā JW was founded to solve these issues. It offers a 100% cloud-based platform, has transparent subscription pricing, and offers a low-touch user experience geared towards Millennials and Gen Z.

The company’s also in the very early stages of its growth. Its target customers are businesses with 100 employees or less that collectively employĀ about 40 million peopleĀ in the U.S. Given that JW represents 140,000 employees right now, its growth potential is very strong.Ā 

Justworks has priced its IPO at a midpoint price of $30.5 per share, which translates into a market cap of $1.9 billion and a P/S ratio of 1.9. It’s a very reasonable multiple given its gross margin profile. While subscriptions generate high margin revenue, its benefitsĀ and insurance fees have razor-thin margins, keeping itsĀ total gross margin at about 10%. In other words, JW will always trade at significantly lower multiples than pure SaaS firms due to its low margin segment. Shares start trading on Thursday.

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