Description

Conclusion

I believe ZIP may be one of the few remaining “undiscovered” internet stocks with the following attributes 1) going after a large TAM that is still >90% offline; 2) differentiated product/credible competitive moat; 3) founder-led management team; and 4) proven/profitable financial model.

I think this stock is a base case double over the next 2-3 years, and has asymmetric upside if investors start valuing the business on revenue rather than near-term FCF (see estimates and valuation analysis below)

Overview

ZipRecruiter (NYSE: ZIP, market cap ~$3bn) is an internet-based staffing services company that IPO’d via direct listing on May 26, 2021.

Variant View / Why Does This Opportunity Exist?

1.       ZIP recently went public via direct listing and didn’t get much initial attention from the Street. The company only raised $110m pre-IPO funding from a small number of investors and isn’t well-known in the investing community.

2.       The market cap ($3bn) and trading volume ($30m/day) are too small for most funds to prioritize ZIP in their research process, particularly given the slew of recent tech IPOs.

3.       The stock looks expensive on historical financials or on Street estimates, trading at 43x 2020A EBITDA or ~40x Street 2022E EBITDA. We think the company has sandbagged 2021 guidance and the stock is, in fact, inexpensive relative to its growth profile, trading at 12x our 2023E EBITDA. Additionally, the company has ~90% gross margins and is investing heavily in R&D and growth marketing, meaning management has plenty of room to increase near-term profits if desired (the stock is trading at 4x our 2022 revenue estimate, which is probably a more useful valuation metric than EV/near term FCF).

Business Investment Thesis

1.       Large addressable market with low online penetration and small (but growing) ZIP market share within the online segment. The US recruiting industry is $205bn, of which 6% or $13bn is online. ZIP has ~4% share of the online segment and 0.2% share of the total industry. The online recruiting market is expected to grow at a 14% CAGR from 2016-2025 (per IBIS World), although is currently growing much faster as employment rates recover from the pandemic. I believe these IBIS estimates for mid-teens industry growth may prove to be low, as the WFH trend could catalyze a higher rate of employee turnover over the mid- to long term. 

2.       ZIP’s moat today is primarily a function of its differentiated product and data scale. Over time, this moat should grow wider if ZIP can continue evolving into a 2-sided marketplace for employers and job seekers.

a.       ZIP’s primary point of tech/product differentiation is its job-matching algorithm, which the company’s AI recruiter bot “Phil” uses to recommend 1) jobs to prospective employees; and 2) candidates to ZIP’s employer customers. As “Phil” improves, jobseekers save time by applying for fewer roles and employers save time by evaluating fewer candidates. The company discloses several KPIs that demonstrate its improvement here, e.g., 1) average number of days a job stays posted on ZIP’s platform have decreased from 39 to 16 days from 2016-2020; and 2) the percentage of candidates that employers rate as “great match” has improved from 39% to 56% from 2016-2020.

b.       The consumer experience on ZIP is vastly superior to the experience offered by other job listing sites and for consumers is arguably more analogous to working with an actual recruiter than searching for a job online. ZIP’s app has been the #1 rated recruiting app on both iOS and Android for the past 4 years. As a consumer using ZIP, you avoid having to search for job listings and apply separately on multiple employer sites.  You fill out one application with ZIP and then “Phil” sends you tailored opportunities with an “invite to apply” button that leverages your existing ZIP profile. Phil follows up as the employer evaluates your candidacy, and ultimately lets you know whether the employer decides to give you an interview (based on consumer surveys, one of the most frustrating aspects of the job search process is never hearing back from a potential employer).

3.       The company has significant pricing power, given it currently charges its employer customers a fraction of the typical cost to fill a job seat. The typical external recruiting cost per hire for a US employer is ~$3k. ZIP discloses that it typically fills a job listing in <1 month, and its average monthly revenue per employer customer is ~$350. Assuming the typical ZIP employer customer has 2-3 listings on average, this implies a cost per hire of ~$100-$200, likely <10% of the cost per hire of traditional recruiting services. ZIP can offer a low-cost proposition because its AI-based recruiting system has very low marginal cost, whereas traditional recruiting services are labor-intensive / high marginal cost.

Catalyst Path

The company is reporting 2Q earnings August 12 aftermarket. Given the company IPO’d via direct listing on May 26 and the market cap is ~$3bn trading ~$30m daily, I believe the stock is still largely “undiscovered” and the next few earnings reports could help garner more attention from the Street & institutional investors. It helps that 2021 guidance is likely sandbagged & Street expectations are therefore likely materially too low, so the company should be able to report optically strong results the next few quarters (I am modeling 2021 revenue growth of 65% vs. Street 42%).

Key Risks

-          Our IRR analysis and view on the catalyst path for the stock is predicated on our view that 2021 guidance is conservative, which is based partially on 1Q21 results and 2Q21 guidance. It’s possible that management found a way to juice 1H21 results in conjunction with the company’s May IPO. Management and key pre-IPO stockholders sold significant stock in the IPO. This is a major near-term risk and would also call into question the credibility of management, which is a longer-term risk for the stock.

-           The company’s growth has been inconsistent, and our price target requires that growth over the next few years outperforms relative to recent history. Revenue grew just 18% in 2019 due to employer attrition. The company appears to have turned this around this year (1Q21 was the best quarter in its history for employer net adds), but I would want to better understand what happened in 2019.

-          It’s hard to know to what extent ZIP relies on SEO/SEM to attract employers and consumers (as a reminder, the company spends ~50% of revenue on S&M). If its SEO rankings fall or SEM costs increase, its hard to know how this would affect margins and/or growth. The company disclosed that roughly half its marketing costs in 2020 were related to “employer acquisition,” but we don’t know what % of S&M was related to jobseeker acquisition.  

Company Overview

The company was founded in 2010 (and bootstrapped till 2014) as an online job listings marketing aggregator for SMBs. For example, if Barrier wanted to hire one or more back office employees, we could have paid the initial version of ZIP a monthly subscription fee to market our job listings across dozens of internet ad platforms such as Indeed, Glassdoor, Facebook, Google, etc. In 2014, ZIP launched a consumer-facing platform designed to match jobseekers with ZIP customers’ job postings. ZIP built an AI-driven bot called “Phil” that functions as a virtual recruiter, sending jobseekers targeted and personalized emails that are similar to emails sent by human recruiters. I have tried the product myself and can attest to the fact that Phil is eerily human and endearing. ZIP’s corporate ethos is product-oriented, which I think is critical given the historical context of internet success stories such as FB, RDFN, CVNA, etc. ZIP’s IPO investor presentation is helpful in understanding the company’s culture: Link

Earnings Model

ZIP makes 100% of its revenue from employers (the product is free to use for jobseekers). Unlike traditional staffing firms or other internet staffing platforms which charge on a seat-filled basis and cost-per-click basis, respectively, ZIP primarily charges customers on a subscription basis. This helped ZIP gain credibility with employers, because ZIP could initially offer a free (or inexpensive) subscription trial and ramp prices over time.

ZIP’s revenue is 80% subscription-based and 20% cost-per-click. SMBs are charged on a subscription basis and larger enterprises pay on a cost-per-click basis. The latter category is growing faster than the former as ZIP is just starting to be big enough to be a worthwhile employee sourcing channel for larger enterprises.

Revenue build: ZIP discloses quarterly paid employers, which is how we drive revenue (# of employers * revenue per employer). As of 1Q21, ZIP had 115k paying employers, which generated $350 monthly revenue, on average.

Income statement / earnings quality (see financial summary below):

-          Gross margin 87% and stable

-          S&M ~50% of revenue and volatile. The company historically has spent most of its gross profit on marketing, split roughly equally between performance-based/customer acquisition spend and headcount/brand marketing.  In 2019, S&M was 64% of revenue and EBITDA margin was 2%. In 2020, the company reduced marketing spend and EBITDA margin was 19%. The company has said it intends to ramp up spending again this year.

-          R&D 14% of revenue and levering

-          G&A 9% of revenue

-          EBITDA margin 19% in 2020, guided 4% in 2021 due to a combination of $32m one-time IPO expenses and ramp in S&M spend. Mid-term target margin is 30%.

-          Quality of earnings is high and reported EBITDA is a decent proxy for FCF. Positive working capital; capex 2% of revenue; SBC 1.5% of revenue historically (will be interesting how this trends post-IPO).

Balance sheet: no debt, cash $103m.

ROIC: company was bootstrapped till 2014 and hasn’t need to raise much outside capital. The company has raised a total of $110m across two funding rounds (most recently raised a $50m series B at $1bn valuation in Oct 2018). For a company that has only been around for 11 years and is on track to generate nearly $700m revenue and $100m profit this year, it’s very impressive that ZIP has only raised $110m in financing to date.

Management / Key Stakeholders

CEO Ian Siegel founded the company in 2010. He was previously CPO of MyLife.com (an online reputation management company) and has past experience in product at Stamps.com and Rent.com. He owns 14m shares of ZIP worth ~$400m (13m of these shares are in class B stock). He sold ~10m shares following ZIP’s IPO).

CFO David Travers joined ZIP in 2016 after co-leading ZIP’s Series A fundraise as managing partner of VC firm Basepoint Ventures. He remains MP at Basepoint. He owns 5m shares of class B stock via Basepoint Ventures and does not own material class A stock (he has been selling stock since the IPO).

Institutional Venture Partners: co-led ZIP’s Series A in 2014 and led the series B in 2018. Pre-IPO owned 45m shares, split between classes A and B. Currently owns 21m shares, 16m of which is in class B stock. The firm’s relationship is led by Eric Liaw who sits on ZIP’s board.

Notable Board Members

-          Emilie Choi, president & COO of Coinbase and on BoD of Naspers and Prosus. Previously head of corp dev at LinkedIn from 2009-2018

-          Blake Irving. On BoD of Autodesk and DOCU. Previously CEO of GDDY

Valuation / IRR analysis

There is asymmetric upside for the stock if the market starts viewing the businesses as an “internet marketplace” (rather than merely an online staffing services company). The stock trades at 4x Street 2022 revenue (revenue is growing >40% this year), whereas internet marketplaces with this growth profile tend to trade at double-digits revenue multiples.

Catalyst

The company is reporting 2Q earnings August 12 aftermarket. Given the company IPO’d via direct listing on May 26 and the market cap is ~$3bn trading ~$30m daily, I believe the stock is still largely “undiscovered” and the next few earnings reports could help garner more attention from the Street & institutional investors. It helps that 2021 guidance is likely sandbagged & Street expectations are therefore likely materially too low, so the company should be able to report optically strong results the next few quarters (I am modeling 2021 revenue growth of 65% vs. Street 42%).