ZipRecruiter: Visible Long-Term Secular Trends (NYSE:ZIP)

Investment thesis

ZipRecruiter (NYSE:ZIP) uses artificial intelligence and data analysis to recommend candidates for open positions and present job seekers with relevant job opportunities, which could make it easier for both job seekers and employers to find the right fit and potentially lead to a faster time to hire and less employee turnover. With a large user base and job postings, ZipRecruiter has accumulated a significant amount of data, which could give it a competitive edge in improving the quality of its matching algorithms and enhancing the overall user experience.

Business overview

It helps businesses find and hire new employees by means of a variety of services like job boards, posting, web apps, candidate screening, applicant tracking, and email alerts. ZipRecruiter is a global HR software that primarily serves customers in the US and UK.

Recruiting and seeking job online is not as easy as it seems

Companies have used the internet to find candidates for a long time, but unlike other web services (like shopping), finding the right candidate is still challenging. There are a number of obstacles that businesses must overcome, which makes finding and hiring the most qualified candidates time-consuming and inefficient. In my opinion, recruiters have two main objectives: (1) they want to attract a large enough pool of qualified applicants to make a decision, and (2) they want to assess each candidate’s suitability for the position. When there are a large number of applications to sort through, it can be difficult to determine which ones are of the highest quality.

The search for employment, on the other hand, is arduous and time-consuming. I think job-seeker-specific technology has the potential to reduce frustration and increase success when looking for work. The reality is that there is rarely a centralized hub where everyone can find work. In order to find a suitable position, job-seekers often have to conduct a comprehensive search across a number of different sites. The time investment required to locate the “one” among the millions of job postings is prohibitive even if one exists. Reading through lengthy job postings and lists of required skills can be a time-consuming and frustrating part of finding work. Last but not least, after spending time and effort searching for the perfect job, most people never hear back from the employer.

ZIP is the bridge that connects both sides of the network

ZIP’s market serves as a conduit between potential employees and hiring companies. ZIP, I believe, has built a proprietary data asset due to the high volume of its market, which allows them to maximize compatibility and dynamically adjust their recommendations based on user actions. This is one of the main reasons why I think ZIP is the best platform. ZIP’s success is based on its use of multiple signals from the job market, including the job requirements, cv views, applicant ranking, and employer response.

ZipRecruiter’s main objective is to create efficient means of delivering qualified job seekers to employers of all sizes and in all fields. ZipRecruiter simplifies the process of attracting talent for businesses that might not otherwise be able to afford it in the United States. ZipRecruiter offers a data-driven, performance-based pricing structure for those with the means to use it effectively in their pursuit of top talent. For instance, ZipRecruiter uses AI and data to recommend candidates for open positions, as well as people whose profiles are similar to those that were liked by the hiring manager.

For job-seekers of all experience levels and in every industry, ZipRecruiter is like having your own personal recruiter who presents you with great opportunities, actively promotes your qualifications to employers, and keeps you up to date on the status of your application.

Powerful network effects as the platform scales

With 25 million monthly users engaging with 9 million job postings each month, ZIP amasses a sizable data asset. Since the company has already amassed billions of data points, I believe it will continue to invest heavily in R&D in order to extract even more value from this data and advance the quality of its platform. In my opinion, it is essential to invest in R&D rather than cutting back on it in order to increase profits, as doing so will result in a better matching experience, less time spent by employers evaluating candidates, and a faster time to hire. All of these things would boost an organization’s return on investment, which would lead to less employee turnover on the ZIP platform.

The company’s use of artificial intelligence in the form of a recruiter named “Phil” is one such method; other strategies include improving the quality of candidate recommendations made to employers and creating a more customized headhunter experience for job seekers. I believe there is a direct correlation between the rise of technology and the improvements in employer response rates, job-seeker application rates, and user engagement across all three of these metrics. Hence, I believe ZipRecruiter has a great chance to gain market share from non-digital channels, especially offline ones, and rival platforms if they keep investing in technology.

In essence, the company is able to develop its superior matching capabilities thanks to the sheer volume of transactions occurring in the ZIP marketplace, providing it with access to a rich and continually expanding data set consisting of billions of signals. There is a positive feedback loop of network effects in the labor market when the number of jobs increases, the number of people looking for work increases, and the technology used to match them improves.

Growth levers

Personally, I think the growth algorithm used by ZIP is quite elementary. Its ultimate purpose is to improve compatibility between employers and prospective employees. These three expansion avenues will boost ZIP’s revenue and help it maintain its competitive edge through network effects. Additionally, the market is massive, with online recruiting making up less than 10% of the market with projections of rising to 8% by 2025.

I think there’s room for significant growth in ZIP’s employer base, from start-ups to Fortune 500 companies, because the platform is built to accommodate businesses of all sizes and in all areas of the economy. Despite there being over 5 million employers in the United States, only a fraction of them were participating employers in ZIP’s marketplace. Therefore, attracting more employers is a huge possibility for development. Given that ZIP has typically directed its marketing toward businesses, I believe there is a huge opportunity to increase ZIP’s presence among job seekers. I think that if ZIP can maintain its status as a market leader, it can continue to attract Active Job Seekers while also finding creative ways to engage those who are merely curious about exploring new opportunities.

Last but not least, there’s the opportunity to enter new international markets. ZIP has already launched in Canada and the UK in addition to the US. There is no doubt in my mind that employers and job-seekers alike would benefit from a more streamlined and expedited hiring procedure. This leads me to believe that other markets could benefit from ZIP’s advantages, especially the company’s technology that was developed specifically to facilitate communication between recruiters and prospective employees.

Valuation

Based on secular trends mentioned in my thesis and historical growth, I believe ZIP can continue to grow over the long term, albeit a slowdown in FY23 due to a bad economy. Growth should reaccelerate once the economy recovers and as companies restart their hiring engine.

My model suggests ZIP could be worth 46% more than its share price today if multiples are to remain the same in FY24. I believe this is likely to happen as FY24 is where I expect ZIP to see growth reaccelerate to a positive.

Model walkthrough:

1. Revenue is expected to see a huge rebound in FY24/25 but will face a slowdown in FY23 due to bad macro-economics.
2. Margins to expand gradually as ZIP scales
3. ZIP to trade at a market multiple of 16x earnings in FY24

Risks

The competitors are tough

Existing competitors, including LinkedIn, Indeed, CareerBuilder, Monster, Glassdoor, and Craigslist, and potential competitors, including Google and Facebook, are well capitalized and could compete more aggressively

Recession / bad macro

Long-term effects on the job market from economic shocks like COVID-19 in 2020 could be detrimental to ZipRecruiter’s bottom line. The US unemployment rate is still near record lows, so there is a good chance that mean reversion will occur and have an impact on ZIP.

Conclusion

ZipRecruiter is a global HR software company that helps businesses find and hire new employees through a range of services including job boards, web apps, and email alerts. With 25 million monthly users and 9 million job postings each month, ZipRecruiter has accumulated a significant amount of data which could give it a competitive edge in improving the quality of its matching algorithms and user experience.