Digital Job Board Self-Styled as an “AI Recruiting Platform” Still Subject to Mean Reversion in the Labor Market
1) Thesis Description
ZipRecruiter (ZIP) claims to be a two-sided marketplace for job seekers and employers that utilizes a proprietary AI to curate and improve the recruiting process, when, in actuality, the company is more akin to an employer-paid job advertising channel charging SMB’s on a per job posting basis, requiring massive spending in sales and marketing to maintain market share. Even worse, its substantive R&D investment into its AI-based features seems unlikely to offer ZIP any long-term differentiation versus rivals.
The post-pandemic labor market has exhibited over 2x higher unfilled job openings (JOLTS) and almost 2x the level of job turnover (quit rates) than the pre-pandemic average, signaling that many companies were having a hard time finding and retaining new hires. Notably, economists and other financial participants have observed that inflated job openings relative to other labor statistics since the beginning of the pandemic was likely caused by the near-zero cost for employers to post more job listings and likely some amount of labor hoarding to maintain worker supply in a high turnover environment. In turn, the company experienced a surge in the number of employers paying to use its platform (“paid employers”) and in revenue per paid employer (RPPE). However, ZIP has already seen these metrics softening, even as job openings remain elevated at ~55% above pre-pandemic levels with quit rates (a proxy for labor turnover) at ~ 25% above the pre-pandemic averages. That's why many funds have dropped ZIP, but a few top ones still have exposure such as:
Further, the ease of online job posting is likely the cause for elevated JOLTS job openings and assuming high correlation between the metric and ZIP’s revenue may give investor’s false buy signals, while the company’s fundamentals deteriorate from poor strategic positioning and zero-cost alternatives for customers.
ZipRecruiter’s weakness stands out against a backdrop of unemployment near a cycle-low of ~3.7%, which is biased to go higher as the Fed seeks to lower inflation. Rising unemployment would entail employer’s laying off workers with cuts to job postings and HR advertising budgets. However, even with minimal unemployment changes from this point in time, a reduction in labor market turnover would be sufficient to see further weakness in the company’s leading KPIs, driving the stock lower. Meanwhile, consensus still anticipates a ‘hockey stick’ ramp in after ’23.
Additionally, should the labor market go through a downcycle and start to revert to its pre-pandemic mean, ZIP’s value proposition would shrink dramatically, and its recovery would take about as long (12-24 months) as that of the overall labor market, much slower than one would expect from an ‘AI’-enabled digital marketplace.
The thesis is as follows:
2) Business Analysis
A Brief History – Both Destination and Transmission Conduit for Job Postings, Optimizing for Engagement
ZipRecruiter, headquartered in Santa Monica, CA, was founded in ’10 by Ian Siegel, Joe Edmonds, Ward Poulos and Will Redd. The company was built as an online job site, and in ’15 started an R&D department in Israel to develop solutions to address online hiring inefficiencies, namely improving matches between job seeker and employer. Unlike other job boards that are simply destinations, ZIP has the ability to disperse a job posting to a network of partnered job sites to maximize exposure.
The online recruiting process can be segmented into five steps: Search, Click, Apply, Interview, and Hire. The front end of the process includes the first three segments, which require getting a job seeker’s attention with a posting they could be interested in and getting them to create a profile and then apply. Importantly, only 10%-15% of applications reach the interview stage and almost 90% of job seekers never finish an online application. This is the domain in which ZipRecruiter operates.
The interview and hire segments typically require an API integration with an application tracking system that the employer uses. An ATS does not have to send back recruiting efficiency data to ZIP.
The value of ZIP in the front end of the hiring process is to maximize a job posting’s reach on the Internet and to simplify a job seeker’s interaction with it. Where the company has improved upon these basic functions is in the application of ‘AI’ (really just keyword matching) to its database of resumes and job postings. When it finds a good match between a job seeker’s preferences and an employer’s job requirements, it notifies both parties. This system can reduce time to hire and increase the likelihood of a successful hire. However, since ZIP cannot determine the outcome of a match, its value proposition is limited. It does not have the full suite of services necessary to become an actual digital recruiter.
The company’s revenue is derived from hosting job listings for a fee on either a subscription (70%-75% of revenue) or performance (20%-25% of revenue) basis. Performance fees are typically for enterprise clients and accordingly, SMB comprise 70%-75% of revenue. There are roughly 10.5M jobs on the platform, ~20% remote, and ~80% lower than $60K salary.
Subscription Plans and Pricing
The company’s subscription plans are a succession of one-month contracts with most customers on the platform for a term of 1-3 months. Pricing is based on number of job listings – anywhere from free for a small number of posts, to several thousands of dollars for many. Fees are also dependent on what tier is used: Standard, which simply posts a job to many sites, Premium, which allows employers access to ZIPs database and Pro, which uses SEO to speed hiring for ‘urgent and hard-to-fill’ jobs. Pro is the only plan in which ZIP allows ATS integration. Moving from a Standard or Premium tier to a Pro plan is on average ~2x more expensive.
Performance Plans and Pricing
Performance plans are used primarily by enterprise clients, and pricing is on a cost-per-click model. This is very similar to programmatic ads where the price of the job posting is determined by the demand for screen space and the quality of the data to target a job seeker. Notably, performance has nothing to do with whether someone is actually hired.
Management History – Insider Ownership Dropped to ~60% Economic Interest (90%+ Voting Control) Post-IPO, Capital Allocation Strategy Benefits Insiders and Hides Significant Common Shareholder Dilution
Co-Founder and CEO Ian Siegel owns ~14% (~1% ownership via Class A shares), with a ~$1.1M salary of which 50% is a performance-based cash bonus. Mr. Seigel’s previous roles were at Stamps.com and Rent.com as a Web Developer VP from ’98 to ’06, VP of Technology and Chief Product Officer and Pictage.com and MyLife.com respectively, from ’06 to ’11.
Interestingly, MyLife.com, a background information firm, has had numerous accusations concerning false solicitations and inappropriate billing practices. The CEO and Owner, Jeff Tinsley, was sued in 2020 by the DOJ for deceiving consumers.
Timothy Yarbrough was promoted to CFO in December 2021, with former CFO since 2015 David Travers being promoted to President. Mr. Yarbrough has a ~$2.7M salary, of which ~$400K is a cash base and $2M is in stock awards. Prior to being CFO, he was the Chief Business Officer and SVP of Finance at ZIP since 2014. Mr. Travers as President had a similar compensation scheme in 2022, after being awarded $5.5M in stock grants in 2021.
Qasim Saifee was promoted to COO from CMO in late 2021, Previously, he was ZIP’s SVP of Marketing since 2018. Mr. Saifee has over a decade of experience managing programmatic advertiser marketplaces, first as a Senior Director at Yahoo, and then as SVP of Monetization at OpenX for almost nine years.
ZIP’s other co-founders, who are no longer involved in the operations of the company, Joe Edmonds, Ward Poulos, and Will Redd, collectively own ~23% as of mid-2023, down from ~34% at IPO.
The executive team and insiders own ~17.5% economic interest in ZIP (excluding IVP, and Hadley Harbour Masters, a total of ~25%), ~80% are Class B common shares with 20x voting rights.
Concerning capital allocation, the most likely reason for ZIP’s direct listing IPO was to be free of restrictions from insider lockups. Similarly, ZIP’s early 2022 debt issuance layered on high-cost debt not to conduct M&A over time (which would have been strategically beneficial), but rather to provide exit liquidity for insiders. Across the board, insiders sold down their positions post-IPO, to the point where their ownership level went from ~90% to ~55%, including two PE firms who still own ~25%. Given their historical trading patterns, we expect these firms to lower their ownership percentages to the single digits after another year.
Following its $550M debt issuance, the company announced a $100M share repurchase in March 2022 and an additional $150M in June, followed by $200M in late 2022 and another $100M in early 2023. That’s a total of $550M authorized for buybacks, of which ZIP has already spent ~$500M. After increasing shares from ~97M to ~127M from stock awards to management post-IPO, the company has reduced shares outstanding to ~101M, mostly by buying from insiders, offsetting share dilution.
Since the IPO, ZIP has generated ~$235M in free cash flow, of which $205M has come from SBC addbacks (over $25M per quarter or ~10% of revenue). Excluding the IPO share grants in 2Q/21, SBC was ~65% of FCF. Absent another debt-financed buyback program, even a ~30% reduction in the current SBC run-rate would still increase shares outstanding on the order of ~3.85% per annum.
Customer Dynamics – Price and Economically Sensitive SMB’s Majority of Revenue, Enterprise Clients Higher-Value and Sticker; Look to Company as Ad Channel to Fill Jobs
Roughly 70%-75% of ZipRecruiter’s revenue is derived from SMBs, many of which are short-cycle customers, posting only for their near-term hiring needs. The remaining 20%-25% of revenue comes from enterprise customers who typically conduct longer, higher-volume hiring programs. Notably, ZIP spends a portion of its S&M budget to attract paid employers, not just job seekers, to its platform.
SMB’s are more economically sensitive than their larger, better-capitalized enterprise peers, leading to greater variability in ZIP’s revenue base and more churn within its paid employer metric. SMB’s typically pay per job slot and don’t require the ATS integration included in a Pro plan. However, with greater demand and turnover in the labor market, these customers are paying up to stay in front of potential workers. ZIP’s Pro plan, which costs roughly twice as much as its standard plan, leans into this urgency in hiring by offering ‘top of the screen’ visibility and other features that send an employer more ‘matched’ job seekers more quickly. If not for the high quit rate regime currently in place, the better ZIP is at getting an SMB a potential hire, the quicker an employer would leave its platform by dropping the job listing once it’s filled (although the employer would likely return when it needs another new hire).
Larger SMB’s who require ATS integration (and the Pro plan) likely need a person to run the back end of the hiring process – i.e. interviewing and hiring. These are components ZipRecruiter doesn’t have and doesn’t seem intent on developing. As such, even SMB’s using the higher-cost plans use ZIP merely as a means of advertising their job postings. If economic pressures persist or even intensify, they would likely respond quickly by cutting their job ad budgets and possibly number of employees. If ZIP were directly embedded in the paid employer’s HR function, these SMB’s would likely maintain some spending with ZIP even when times are tough. Instead, even facing just moderate economic pressure, paid employers have already left the platform in droves, falling from ~170K in mid-2021 to ~105K in 1Q/23. We suspect most of the leavers were SMB’s.
Enterprise customers (including META) typically require a consistent level of job postings for higher churn positions. However, given the volume of jobs, these customers pay based on cost-per-click (CPC), which is subject to real time supply and demand dynamics like programmatic advertising inventory auctions. Notably, the enterprise clients do not pay for cost per hire; they pay for mere engagement with their job posting. Since ’18, ZipRecruiter has increased its enterprise client base from ~10% of revenue to 20%-25% by ’20, where it has stayed ever since.
While contracts are called subscription, the terms allow for roughly 30 days’ notice on job listings, leading to ZIP having little visibility into their customers plans.
As the labor market either undergoes a traditional downcycle or normalizes (JOLTS openings and quit rates revert to pre-pandemic levels without unemployment stresses), ZIP’s customer base of price sensitive SMB’s would most likely either cut job advertising spending or move down to lower cost plans to save money, while enterprise clients CPC-based pricing comes in simultaneously in real-time. Additionally, the company appears to be challenged to move further up the value chain with customers given their lack of attribution and measurement abilities on its hiring matches beyond simply engagement.
Supplier Dynamics – Resume Database and Supply of Job Seekers Critical but Dependent on Sales and Marketing Spend; Minimal Network Effects
ZipRecruiter’s main suppliers are the job seekers who send their resumes for job applications. High numbers of resumes are critical for the company, both to create a database on which to train ZIP’s AI system, and to attempt to establish a network effect that brings employers to the platform and keeps job seekers on the site.
However, job seekers don’t stay on the ZIP platform for long once they have applied for a job (the average is 5-10 weeks). Also, their resumes may become outdated over time, limiting their usefulness in ‘matchmaking’ and AI training. Finally, job seekers may not have directly applied through ZipRecruiter’s website but through a partnered site, which the company pays for. Due to these dynamics, the company doesn’t appear to have substantive network effects and must spend on S&M to bring job seekers back onto its platform the next time they’re searching for a job.
Competitor Dynamics – Basic “Search-Click-Apply” Job Boards Have Low Barriers to Entry; Larger Competitors with End-to-End Digital Hiring Solution Add More Value at Enterprise Level
Globally, there are over 50K basic “Search, Click and Apply” job sites, with only a handful directed towards niche job sectors that appear more resilient to new entrants. Most of them instead operate in a highly competitive environment with duplicative postings placed on multiple sites to reach as many potential job seekers as possible. Of the generalist job boards, ZipRecruiter is one of the largest. Its ability to disperse a job posting to affiliate sites is a competitive advantage in that segment of the market.
In the US, the biggest job sites are Indeed (owned by Recruit Holdings, 6098.JP), LinkedIn, ZipRecruiter, CareerBuilder, and Monster. Except for ZIP, each of these other entities has ancillary products and services to keep job seekers engaged on their platform. (In the case of LinkedIn, the network itself is the product, with the job listings as ancillary.)
LinkedIn and Indeed lets employers post small numbers of jobs for free, well below ZipRecruiter’s price point. Moreover, LinkedIn has up-to-date resume information by nature of its social media-like core business and is typically used for finding specialized jobs as ~95% of recruiters use the site. CareerBuilder and Monster are used as a data collection funnel for their parent companies’ ATS and/or other recruiting services.
Notably, Indeed, the largest job site, and the remainder of Recruit’s HR Technology segment, generated ~$7.8B in ’22 and was responsible for ~45% of all online-based hiring in the US in ’20 as opposed to ZIP’s ~4%, according to third party providers. Indeed’s database of over 200M resumes (~50M at ZIP) creates a data advantage that should accelerate AI/ML developments over its smaller competitors. The company is owned by Recruit Holdings (6098.JP), which also owns Glassdoor and several ATS solutions, creating a complete end-to-end solution. Enterprise clients value this simplicity and ability to determine hiring effectiveness.
Recruit believes it can increase its take rate from ~1% of salary to 2%-3% by transitioning its enterprise clients from cost-per-click to cost-per-qualified applicant. With an average salary of ~$60K in the US, an enterprise-level 3% take rate for Recruit for a end-to-end solution equates to ~$1.8K per paid employer, as opposed to ~$1.7K for ZIP’s ad channel.
Importantly, Indeed’s application-to-interview percentage at 4% is over 2x ZIP’s. In an attempt to determine cost-per-hire efficiency with the third-party data (company revenue in millions divided by % market share of candidates hired), ZIP as an ad channel is very expensive at ~$225 per market share percentage hired ($905M in revenue, 4% hired) versus Indeed’s entire HR Technology stack at ~$175 per market share percentage hired (~$7,800M in revenue, ~45% hired).
In sum, ZipRecruiter is better than most job boards for garnering attention, but outside of an urgent hiring environment it’s outmatched on price, scale, AI development, and hiring efficacy by Indeed and a few others who offer cheaper alternatives.
Market Trends – Job Posting Market Cyclical, Secular Growth in Online Recruitment Slowing, Appears Mature
Job Market – Openings and Turnover
Since ’80, unemployment has cycled between a near-low of ~3.7% (current reading as of May ’23) to as high as 14.7% (April ’20), averaging ~5.5% through a cycle with durations ranging 4 to 12 years. Job openings per unemployed person are near all-time lows at ~0.6, while the post-GFC era averaged ~3.5. In absolute terms, job openings averaged ~6.5M (3.5% rate) post-GFC, peaking at ~7.5M in ’19 (4.8% rate). Post-pandemic, job openings soared from ~4.7M in early ’20 to over 12M (7.4% rate) in March ’22, which have since declined to ~10.1M (6.1% rate) in April ’23.
Notably, the job opening rate vs unemployment rate (Beveridge Curve) for current levels of unemployment show job openings are ~40% higher than previous cycles (’00-’23 data). This variance in job openings and unemployment is historically anomalous, steering macro economists at the Fed to look at other measures to determine tightness or slack in the labor market (i.e. quit rates). These economists’ postulate that the ease of online job postings has elevated the job openings metric.
Quit rates (as a % of jobs), thought of as labor turnover, averaged 1.9 post-GFC, peaking at 2.4 in late ’19. Post-pandemic, quit rates dropped to 1.5 in early ’20, rebounded up to 3 in early ’22, and have declined to 2.4 as of April ’23, still 30% above post-GFC average. Quit rates can decline without impact on unemployment levels, are correlated to JOLTS job openings and are a proxy for inflationary pressures in the labor market (voluntary job changes typically include a pay increase).
Typical costs to hire an employee averaged ~$4.5K in ’22.
Online Job Posting/Recruiting
As of early ’23, approximately 85% of all job seekers in the US used online resources, almost the same level as in ’15. As a percent of total US HR spending ($280B in ’22 growing ~1% per annum), online job recruiting was ~3% of the market in ’16, increasing to ~5% in ’19. Notably, post-pandemic online job recruiting only amounted to ~6% market share in ’22 (flat from ’20) an increase of 100 bps from ’19, despite rapid adoption in all forms of digital channels. Going forward, online recruiting market growth is expected to slow from ~15% to ~6% per annum and reach ~8% market share in five years.
3) Why now?
ZipRecruiter’s business is overearning due to historically anomalous elevated job listing levels and labor turnover in the tight post-pandemic labor market. However, that market, currently under pressure, is predisposed to revert to the mean. Additionally, the company is structurally disadvantaged, having to spend inordinate amounts on sales and marketing to stay relevant to employers and job seekers alike, with minimal pricing power and several cheaper, more effective competitors. With the name trading above 10x EV/EBITDA on elevated expectations of 30%+ adjusted EBITDA margins and the resumption of 10%-15% per annum growth after a few quarters of declining sales, a deterioration in job postings to peak post-GFC levels (from current levels, that would mean a ~20% reduction in job openings and a ~10% in quit rates) would imply modest downside. Should the labor market correct to pre-pandemic mid-cycle fundamentals over an extended period on par with historical norms (meaning a ~30% reduction in job openings and a ~25% in quit rates), ZipRecuiter’s current share price offers material downside risk.
We advocate entering into a short position as the company has already weakened from a decline in job listings and labor market turnover, all of which are still elevated, while consensus remains optimistic on solid adjusted EBITDA generation from SBC and cuts in strategically important S&M spending. Additionally, ZIP’s RPPE (up 15% y/y in 1Q/23) should start to show considerable decline more closely matching declines already seen in paid employers on the platform (down 30% y/y). Further, downside share price pressure should intensify in the coming quarters as ZIP’s debt-supported buyback, which has supported insiders selling their positions, comes to an end and the firm is unable to buoy the share price given minimal FCF generation.
A few key points below illustrate the company’s dubious value potential at this point in time:
4) Concerns/Thesis Pressure Points
Employer Behavior Risk
ZipRecruiter’s revenue base is predominantly SMB’s, who are typically lower-value and only require minimal solutions for hiring. Should the company maintain a higher number of SMB paid employers or expand its enterprise revenue percentage, it would signal a change in the underlying value proposition of the firm and its overall stability through a cycle.
Upselling AI and New Product Risk
The company has spent 15%-20% of revenue on R&D per annum to develop its ‘AI’ and new products that facilitate easier interaction between job seeker and employer. While our research indicates that RPPE doubled to ~$1.95K per paid employer due to tight labor conditions, if the RPPE stays elevated through a slackening of the labor market it would indicate that employers are paying increasing amounts for ZIP products.
New Revenue Source Risk
Should the company’s position be stronger than our research suggests, there is a possibility that ZIP may attempt to charge job seekers for access to its platform, marketing their platform as a quick way to get hired. This would align with management commentary of being a ‘two-sided’ marketplace and would represent a new revenue source outside of our expectations.
Labor Market Risk
Our base case implies a stable labor market with quit rates reverting to norm, which should feed through to lower RPPE. Should the market remain tight, it would improve ZIP’s performance (while should the market go through a downcycle, we would expect both RPPE and paid employers to decline meaningfully).
Operating Leverage Risk
The company spends over two-thirds of revenue on S&M and R&D, of which S&M spending is ~52.5%. While lower levels of spending preserve margins in downturns, results to date have failed to show scale benefits. However, should ZIP’s ~$1B in S&M spending the last 4 years create brand recognition, the firm could cut spending considerably and improve margins beyond our expectations with no detrimental impact to its market position.
5) Business Valuation
ZipRecruiter should exhibit slowing growth this year and a modest rebound after ’24, with metrics like paid employers and revenue per paid employer (RPPE) only 10% off its ’22 peaks. The firm generates revenue through charging employers to post job advertisements on its main site, which can also be transmitted to partnered sites for a higher fee.
A summary of the Base Case assumptions for the company is below:
Five-Year Operating Model
A simple five-year operating model is utilized to determine value.
Base Case assumes a normalization 20%-25% above its post-pandemic peak for paid employers on its system and 50% above peak for RPPE with a ~7.5x EV/EBITDA valuation.
Downside Case assumes the company reverts to its pre-pandemic norms of ~105K paid employers and RPPE of ~$1.1K at a valuation of ~5x EV/EBITDA.
Upside Case assumes the company grows to peak post-pandemic levels of ~165K paid employers and RPPE of ~$2.1K on a ~12.5x EV/EBITDA valuation.
Peer Analysis – Trading Comps
Zip’s closest public comparables would be DHI Group and Recruit Holdings (6098.JP, Indeed’s parent company), with the former a more accurate benchmark. Additionally, the acquired Monster Worldwide is an applicable comparable and its history as a public company is presented. The analysis below uses a normalized EV/EBITDA metric to account for how ZipRecruiter should be optimistically valued as its business model reaches a stage of maturity, with lesser variances due to SBC, 10%-12.5% of ZIP’s revenue versus 5%-7.5% of revenue for the group. EV/FCF was not employed given ~55% of ZIP’s FCF consists of SBC addbacks compared to groups ~20% SBC addbacks as a % of FCF.
Public Comparables – EV/EBITDA
Data for those companies are taken from:
DHI Group (DHX) is an amalgamation of job boards including Dice, specializing in technology jobs, and ClearanceJobs, focused on the niche security clearance job market for government employees and defense contractors. The company has ~9K subscription clients and ~6.5M job seeker resumes while touting its use of machine learning capabilities to optimize job searches. While the company exited several underperforming job boards over the last few years and revenue declined, its core business has improved despite near-term tech-specific pressures.
Monster Worldwide was a large-scale job advertisement platform and resume database with the ability to advertise across social media and through an ad network. After peaking at ~$1.3B in revenue in 2008 the company continued its slide to ~$600M before being acquired by Randstad in 2016. By 2016, Monster had ~51K customers and ~150M resumes.
Randstad is a staffing services company that recruits workers and provides HR solutions for companies. Randstad purchased Monster in 2016 to use its advertisement network and job board to create economies of scale from a portfolio of HR solutions.
Recruit Holdings is a HR technology and business solution company, focused on its HR matching capabilities. The company has digital solutions to address every aspect of hiring and onboarding a worker. Notably, since 2012, Recruit has purchased Indeed (2012), SimplyHired (2016), Glassdoor (2018), and resume.com (2018). Arguably, Recruit is not a true comparable for ZipRecruiter, but it’s indicative of what valuation premium an end-to-end HR firm would command relative to a mere job advertisement company.
The group’s normalized EV/EBITDA multiple equates to ~7.5x and has ranged between 4x-20x from 2008 to 2022. It currently trades at ~10x FTM assuming 0%-5% per annum revenue growth. Zip currently trades at ~10x ’23 EV/EBITDA.
Peer Analysis – EBITDA Margins
DHI Group’s operating margins have over time decreased from 35%-40% from 2006-2012 to around 20%-25% ever since. Notably, through a cycle DHX has spent 35%-40% of revenue on S&M and ~5% on SBC. Capital expenditures should average 10%-15% of revenue.
Monster’s operating margins remained relatively stable at ~15% post-GFC, never returning to the previous 25%-30% range of 2004-2007. Notably, the company spent 50%-55% of revenue on sales personnel and an additional ~25% of revenue for marketing, a total of ~75% directed towards S&M, but this spending never seemed to yield any scale merits. Capital expenditures averaged ~5% of revenue.
Randstad’s operating margins remained relatively stable at ~5%, lower than the rest of the comparable group given large-scale staffing operations with considerable personnel. Capital expenditures averaged ~0.5% of revenue.
Recruit’s operating margins have expanded from ~10% to ~15% over five years. Notably, the firm spends 10%-15% of revenue on sales and marketing. Capital expenditures averaged ~2.5% of revenue.
ZIP’s comparable group generates ~20% normalized EBITDA margins. ZipRecruiter currently generates ~20% EBITDA margins and in an optimistic view we could see that expanding to ~30% in the near-term, remaining at those levels through a cycle.
Strategic Acquirer Analysis
From the transactions presented, strategic assets in a high-growth phase warrant 6x-7x EV/Revenue or 30x-35x EV/EBITDA valuations. Slower-growing, mature assets appear to be valued below 1x EV/Revenue or 6x-7x EV/EBITDA, below where ZIP currently trades.
ZipRecruiter is likely past its early growth stage, and as such warrants a valuation more in line with, if not slightly above, the mature transaction comparables (to be optimistic).
Peer Analysis – Conclusion
For ZipRecruiter, a value investing stock, a ~7.5x EV/EBITDA normalized valuation appears reasonable based on the representative comparable group, with Recruit’s ~12.5x EBITDA an optimistic and unobtainable target given ZIP’s strategically inferior business structure. Notably, the company’s potential strategic value to an acquirer is likely at 6x-7x EBITDA given the firm is more mature and slower growing, slightly below its current valuation.
6) Market Expectations/Perceptions
ZipRecruiter is covered by seven analysts with an average price target of ~$20.50/share, five with Buy ratings and two with a Hold. Investor relations consists of management attending conferences, but actual IR interaction is virtually nonexistent. The third-party handling ZIP’s IR does not answer the phone or have voicemail. The company’s buyback is cited as a benefit for shareholders, an opposing view to our analysis above.
Consensus forecasts flat revenue from 1Q/23 onward with 30%+ EBITDA margins, with growth then inflecting upwards to 15% per annum. Notably, backing into revenue with their maintained $185M EBITDA guide for this year on an optimistic 30% margin equates to ~$617M for ’23, ~10% below consensus.
7) Downside Protection – Where’s the Margin of Safety?
The company’s downside is not well-protected even as Zip is trading at modest valuations on optimistic consensus estimates (10x EV/EBITDA). Trough multiples range from 2.75x to 5x EV/EBITDA, or ~60% downside from current valuation. The revenue base is economically sensitive, and ZIP’s relationships with its customers are transactional with short durations. ZIP’s cash flow generation is of low quality as well, with over 50% of FCF due to SBC addbacks (on a backdrop of 3.5%+ annual dilution). The one positive for the company is that in downturns it can cut S&M spending, which is currently ~52.5% of revenue, to protect margins. However, similar business models suggest that the company would be disadvantaged by spending less than 40% of revenue on S&M activities without deeper connections to its customer base.
ZIP might be acquired by a strategic player, although comparables for slower-growing companies like ZIP suggest 5x-10x EV/EBITDA valuations, which does not offer much upside from current levels.
ZipRecruiter, while marketing itself as an ‘AI’-enabled matchmaker, is in fact similar to other job boards in terms of market maturity and margin structure. The company has benefitted from a historically tight labor market, but this market should revert to its mean naturally (quit rates decreasing) or through a provoked downcycle. ZIP’s ‘AI’ differentiation is minimal, and cheaper, superior competitors are poised to offer superior AI features to the market’s highest-value customers.
We believe a majority of investors are aware of these elements, but place too much emphasis on the qualitative marketing aspects that management highlights, while ignoring ZIP’s questionable overall response to the trajectory of job listings and unemployment. Further elevated job listings, which can be posted for free at many other sites, may give investors a false buy signal even as the company’s fundamentals deteriorate, providing a compelling entry point to short the name.