We came across a bullish thesis on ZipRecruiter (ZIP) on Value Degen’s Substack by Unemployed Value Degen. In this article we will summarize the bulls’ thesis on ZIP. ZipRecruiter share was trading at $9.11 as of Sept 6.
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Labor Day often reminds us of changing perceptions of labor, where traditional capitalist versus proletariat paradigms still echoes despite evolving economic realities. In today’s uncertain economic climate, marked by mixed signals about the labor market’s trajectory, there’s a renewed interest in employment agencies. The labor market, frequently influenced by Jerome Powell’s interest rate decisions, seems to be cooling, prompting a fresh look into the staffing and employment services sector.
Interestingly, ZipRecruiter (ZIP) offers compelling insights. Despite recent headwinds in the tech industry, ZIP’s management indicates that the hiring market may be nearing a bottom, with some metrics showing slight improvements. Goldman Sachs also suggests a minor reduction in unemployment, aligning with this optimistic view. However, the staffing services industry remains highly volatile, with performance variances influenced by exposure to sectors like government jobs and healthcare. This uncertainty has pushed down stock prices across the sector.
ZIP stands out among its peers. As large-cap tech stocks have bounced back, there’s potential for a shift to small-cap tech, benefiting companies like ZIP. Despite the overall employment services market declining by 10% since 2019, ZIP’s revenue has grown by 12%, showing its ability to capture market share. ZIP benefits from its flexible cost structure, with costs decreasing faster than revenue, resulting in margin expansion. The company’s founders maintain a significant ownership stake, aligning their interests with shareholders, though there is no recent insider buying.
Trading at just under 2x revenue, ZIP appears cheap by tech industry standards, particularly given its 89% gross margin. Despite the cyclicality of the market, ZIP generated $77 million in free cash flow over the past year and has $500 million in cash reserves, though it also carries a similar amount in long-term debt. Management projects a 15% growth rate through the cyclicality, and if ZIP can achieve $1 billion in revenue as the hiring slowdown reverses, it could potentially trade at 4-6x sales, suggesting a 4x upside within two to three years.
With strong revenue growth, expanding margins, and solid market positioning, ZIP presents a promising opportunity, particularly as the online segment of staffing services is poised to grow significantly. Given the company’s metrics and the potential for substantial valuation rerating, ZIP could be a standout performer in a recovering labor market.
ZipRecruiter is not on our list of the 31 Most Popular Stocks Among Hedge Funds. As per our database, 19 hedge fund portfolios held ZIP at the end of the second quarter which was 19 in the previous quarter. While we acknowledge the potential of ZIP as an investment, our conviction lies in the belief that AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is as promising as ZIP but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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