In our Q2 2025 investor letter we made our first formal statements about a stock that has had a tremendous impact on our fund over the past year. That impact has been in terms not only of performance, but of how it has challenged our own thinking about what constitutes value investing. If you have been following us on social media or have seen some of our podcast appearances last year, you may have already guessed that the stock we were alluding to in our “What is Value?” thought piece was AST SpaceMobile ($ASTS).

In our Q2 letter, we referred to a 70-plus page report we would be releasing to our LPs. That report was released to them in Q4 2025. The feedback we received was overwhelmingly positive, and as a result we’ve decided to release a series of excerpts, summaries, and mini-“deep dives” from it.

Many of you may be saying, “But we have a collaborative relationship where we work through ideas together.”  If that truly applies to you, don’t worry: We will continue to share our work on an individual basis with those of you who add value to our research process. You know who you are, and you’ve been invaluable to us. Thank you. 

Many people have helped us on our $ASTS journey. That’s why when we were discussing which section of the $ASTS report we wanted to release first, it was clear that it could be only one section. Not our valuation math, our comparisons to “competitors” like Starlink (lol), or even our breakdown of the ever-increasing list of corporate and government partners that make this stock so compelling to us. No, it had to be the section about the “SpaceMob” (that’s what the online community of $ASTS-supporting investors call themselves) and the other investors who’ve helped us understand the magnitude of this opportunity.           

The following is an abridged and appended excerpt from the report that was released to our LPs in Q4 2025.  

Connected Conviction – From Deep Diligence to Lasting Community: AST’s Unique Culture

A close friend of the Fund as well as the individual most responsible for waking us up to the opportunity before you today is Toan Tran of 10West Advisors. Toan summed up the business and larger opportunity with beautiful simplicity last November in a write-up published to Value Investor’s Club, a short excerpt of which we’ve included below: 

“ASTS was founded in 2017 by Abel Avellan with a mission to “connect the unconnected.” Abel takes no salary, has never sold stock, and is probably the right kind of crazy. He looks pretty good in a cowboy hat. ASTS has 64 partnerships with over 50 mobile network operators around the world, including AT&T and Verizon in the U.S., that service over 3 billion subscribers. AST will provide service on a wholesale revenue share basis using the partner MNO’s cellular spectrum. For example, if AT&T and Verizon offer AST’s service for $10/month, AST would receive $5/month (50% share). Obviously, not all markets can support ARPUs like the U.S., but AST just needs a little from a lot of people. $1/month from 300 million subscribers is $3.6 billion of super high margin recurring annual revenue from a constellation that costs $1 billion to build and launch. This also does not account for other use cases. The Bluebirds are the largest antennas ever put into orbit with the ability to detect electromagnetic radiation anywhere on earth. I’m sure the U.S. government can figure out something to do with these satellites. Anyway, AST could end up with 1 billion subscribers or something. If that happens, it’s probably worth a lot.”       

Looking back at Toan’s remarkably concise assessment, what strikes us most isn’t just the accuracy of his fundamental thesis but the clarity of his thinking as he cuts through market-related noise. His analysis offers a powerful reminder about what separates prescient investment insight from mere luck in a single paragraph. Our view is bold predictions succeed not through an ability to predict the future (which would be absurd), but by doing the disciplined work required to see the present clearly, seeing reality as it is rather than as we wish it would be.

Much like our analysis offered here today, Toan’s commentary anchors on durable competitive advantages: the physics-defying scale of AST’s Bluebirds as “the largest antennas ever put into orbit,” the capital-efficient wholesale revenue-sharing model, and the optionality embedded in its multi-use satellite capabilities. These weren’t hopeful projections but structural observations about why ASTS would become differentiated at scale and remain that way once its global constellation turns on. And his insight that “AST just needs a little from a lot of people” captures the essence of what makes network businesses so powerful once they achieve critical mass – marginal costs approach zero while the addressable market exponentially expands.   

In any case, perhaps the most important takeaway here is that where others saw a proverbial “instashort,” i.e., a space SPAC meme stonk with an active ATM, Toan saw, in classic Buffett parlance, a 65 proverbial “inevitable,” i.e., an extraordinary business set to benefit from a perfect storm of factors, including an innovative business model characterized by multiple moats, a large and rapidly expanding addressable market, technological leadership, and excellent execution from a mission driven founder with skin in the game and uncommon competitive intensity. Add in an unsustainably cheap valuation based on normalized economics and worst-case growth prospects, and what more could a defensive margin of safety-focused investor ask for?

‍‍On the topic of peers who’ve helped better our understanding of a complicated space (bad pun intended) and the true magnitude of AST’s numerous technological advantages, we'd be remiss to not acknowledge yet another unique aspect of the AST story, "the SpaceMob.”
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For those of you that aren’t familiar, the “SpaceMob” – depicted in the picture above – is an eclectic mix of RF engineers, satellite hobbyists, private investors, and space nerds who, rather than chasing meme-stock theatrics, bring both genuine technical chops and conviction to the table. Think of it as a cult following—but one fluent in spectrum charts, orbital mechanics, and the fine print of 3GPP standards.‍All of which is to say that what’s emerged around AST SpaceMobile is more than just a shareholder base – it’s a community, and an exceptional one at that, filled with dozens of contributors that we’re proud to call friends. With time we’ve come to believe this borderless investor community (brought together by the very digital connectivity that underpins AST’s larger mission) reflects the best of what happens when people come together to pursue a shared mission. The journey is about much more than financial opportunity – it’s a living testament to distributed intelligence, collective action, and what’s possible when we’re earnest in striving to make the world better.

‍Perhaps more to the point, this unlikely group has become both a proprietary expert network and sounding board for us during our ongoing due diligence – which candidly amounts to almost a fulltime job in and of itself. Blending grassroots enthusiasm with real world expertise, unflinching intellectual honesty and a world class sense of humor, the SpaceMob carries diamond hands and more importantly, knows exactly what they own™.

This unique differentiation is fundamental and multifaceted. In contrast, most meme-stock cults, or “stonk” crowds, are driven primarily by emotional momentum, superficial social media hype, and unsophisticated speculation – often wildly detached from fundamental business analysis and characterized by little understanding of what these companies truly do or how they generate lasting value. 

‍Again, unlike meme stock communities, investors in the SpaceMob do their homework – reading technical filings, analyzing regulatory filings, and directly interacting with management and industry experts. There’s a culture of collective enlightenment and robust debate about both risks and opportunities. The former is marked by crowd psychology, echo chambers, and reactionary trading – often jumping in after viral trends, squeezing shorts, or chasing rumors.

‍SpaceMob is a genuine expert network that frequently acts as an informal “distributed expert network,” with actual practitioners in related telecom fields influencing community understanding and helping others separate hype from reality. Meme stock communities as traditionally understood lack this knowledge base, are more likely to misinterpret essential business facts, not to mention generally act in a manner that is anathema to the principles of long-term wealth creation.

We could go on, but the larger point is that the “SpaceMob” stands apart from the average meme stonk crowd by being a deeply informed, technically conversant, and values-driven investor community that supports AST SpaceMobile’s mission with conviction based on rigorous analysis and foundational understanding—not just internet hype or fleeting retail mania.‍We repeat: Unlike retail “meme stonk” crowds, which thrive on fleeting emotional momentum and superficial social media chatter, AST’s SpaceMob is defined by a depth of understanding and technical fluency rarely seen in public markets. Members dissect FCC filings, analyze satellite constellations, and debate regulatory nuances. This is due diligence elevated to an art form: collaborative, rigorous, global, and unafraid of complexity—all in the pursuit of truth, wherever the truth leads them. Better yet, seeing the active resistance of the “institutional imperative” by this amazing group over the last year has been nothing short of inspirational.

‍‍Moreover, with time and reflection, it’s ironic it took us so long to realize that what makes this tapestry possible is the boundaryless connectivity of our time. No longer limited by geography, class, or credentials, SpaceMob members hail from every continent, their backgrounds as diverse as their talents.

‍In this globally connected world, it’s fitting that this community harnesses collective intelligence (i.e., the wisdom of crowds) and accountability in a manner that no single individual, research firm, or actively managed investment fund could hope to match on their own. And to be perfectly clear, we really mean that, as we’ve witnessed firsthand how in the act of collaboration, fierce debate, and mutual education, something extraordinary happened amongst this group of retail enthusiasts - call it a distributed “brain trust” that grows smarter and more resilient with every new member and every challenge overcome.

‍We also want to highlight how, in eras past, investing in emerging technologies demanded physical proximity, access to exclusive networks, or privileged information channels. Today, thanks to the radical connectivity of our age, we are witnessing the emergence of self-organizing global “expert networks”—like AST’s SpaceMob—that bring together engineers, entrepreneurs, scientists, and mission-driven investors from all walks of life. In contrast, we’ve found traditional Wall Street expert networks as well as go-to industry consultants have become closer to contra indicators vs. genuine sources of wisdom and insight. I (Ryan here) can tell you firsthand that we’ve made considerable money on multiple occasions by doing the work on various names where 95% of the expert transcripts that get passed around Wall Street had it exactly wrong.

‍A strange turn, to say the least, that we ascribe to the typical herd behavior that is deeply rooted in human nature and the fact that a Tegus subscription has become table stakes in investment management and thus has come to represent the opposite of the edge these information sources claim. What they really represent is just a novel way for lazy managers to substitute the thinking of others for doing the hard work to know things for themselves.

‍In any case, a community that transcends geography, harnessing the world’s collective intelligence to increase conviction, diligence, and original insights amongst its members well beyond what any individual involved could have assembled on their own is ironically a much bigger edge in 2025 than the tens of thousands of dollars spent by the average manager on subscriptions to expert networks and/or industry consultants. We often laugh about how if the shorts could spend even a day within the private SpaceMob thread they’d freak out, fire their consultants, cancel their expert network subscription and cover their short, all within a week or less.

‍We suspect that lesser value investors would have locked into any number of irrelevant factors, focusing on things like book value, perceived funding shortfalls, trailing financials, or a variety of other traditional metrics that couldn’t be more beside the point.

‍At any rate, we highlight the above because this is what we meant in our latest thought piece “What is Value?” when we talked about how the best valuation work – indeed, the best security analysis - isn’t about what looks cheap now; it’s about uncovering what becomes obvious later, not to mention having the courage to diverge from consensus well before the herd catches on. It’s also why developing a deep understanding of the intrinsic nature of a company’s business, as well as a very good idea of how that business will operate, improve, and scale over time, is fundamental to investing excellence, now more than ever.

‍The claim may annoy or even anger many Fama French style cigar butt investors, but we’re going to say it anyway, not only because it’s the Truth, but because identifying and owning the next great growth business before its widely understood and therefore priced as one, requires an act of forward-looking business analysis by definition. In today’s day and age, the ability to sustainably outperform the broad market indices over the fullness of time absolutely requires one to think ahead to where a company will be several years down the line rather than relying on crude heuristics or backward-looking GAAP financial statements.

‍As much as we wish we could go back in time and invest in the grossly inefficient markets of the great depression or the late 1950’s when Buffett was running laps around the competition, with the full benefit of hindsight, the reality is that world no longer exists and investors that don’t evolve to succeed by adapting to the realities around us, will fail – as so many of our peers have more recently.

It’s also what we mean when we talk about investing with a 5 to 10-year view – as the ability to see second-order effects and structural shifts before they become obvious to consensus thinking is the essence of analytical sophistication and genuinely insightful security analysis. Anyone telling you that durable alpha can be garnered by picking randomly from a basket of statistically cheap stocks culled from the most recent 52-week low list either has a newsletter to sell you or candidly, doesn’t know what they are doing – and that’s being kind.

Given the number of times we’ve seen this stock derided by the lazy for its resemblance to some of the most egregious retail-driven meme stocks, we felt it was important to address some common criticisms of the SpaceMob, and to explain why we take a different view of the company’s association with a passionate group of retail investors. We understand why pod shop analysts and similarly credentialed professional investors residing on either coast may look at this association and say, “I can’t take this to my PM. My career would be over if this blows up in my face. What if he finds out I found this idea on Twitter?” This fear is our opportunity. We will gladly welcome those investors to the SpaceMob once the clouds of uncertainty part and what has been clear to us and the scrappy bunch of investors we are proud to be a part of is rapidly priced in by the backward-looking, Daloopa-worshiping class that dominates Wall Street.

There has been one group of retail investors that resembled today’s SpaceMob: the early Tesla bulls. Before Tesla became a ~$1.5t company, Elon Musk’s grandiose vision for it was better understood by retail investors than it was by Wall Street. Reasonable people can debate whether Tesla deserves its staggering market cap – and we would certainly fall in the skeptical camp – but that’s beside the point. Those Tesla bulls saw what Wall Street couldn’t, invested in that potential, and (aside from a few early institutional converts and Elon himself) were the biggest winners.

Interestingly, Elon has likewise set his sights on satellite broadband internet via his company Starlink, and that decision has thrust the Tesla and AST investing communities together. Each group recognizes the importance of the technology, but disagree on who the eventual winner will be. The SpaceMob spends a considerable amount of time fielding questions from, and battling what we believe are uninformed criticisms from, Starlink bulls. Our next mini-deep dive excerpt will be dedicated to comparing these two companies’ technologies, products, and business models. We hope it will become the go-to reference on the subject, saving our SpaceMob friends the time and effort of typing out the same explanations and counter-arguments over and over again.

We look forward to sharing more excerpts from our full research report on $ASTS. In the meantime, we welcome your questions, commentary, and critiques.            

Disclaimers

+ No guarantee of investment performance

Past performance of the financial instruments mentioned in this report should not be taken as an indication or guarantee of future results. The price, value of, and income from, any of the financial instruments mentioned in this report can rise as well as fall and may be affected by changes in economic, financial and political factors. Any projections, market outlooks or estimates in this presentation are forward looking statements and are based upon certain assumptions. Other events that were not taken into account may occur and may significantly affect their returns or performance. Any projections, outlooks, or assumptions should not be construed to be indicative of the actual events that will occur. Future returns are not guaranteed. If a financial instrument is denominated in a currency other than the investor's home currency, a change in exchange rates may adversely affect the price of, value of, or income derived from that financial instrument. In addition, investors in securities such as ADRs, whose values are affected by the currency of the underlying security, effectively assume currency risk.

+ No guarantee of accuracy

While the information prepared in this document is believed to be accurate, Crossroads Capital, LLC (the “Investment Manager”) makes no representation or warranty as to the completeness, accuracy or timeliness of such information. The Fund and the Investment Manager expressly disclaim all liability for errors or omissions in, or the misuse or misinterpretation of, any information contained herein.

+ No obligation to update or act on information

The Investment Manager has no obligation to update any information contained herein, and may make investment decisions that are inconsistent with the views expressed herein. Any holdings of securities discussed herein are under periodic review and are subject to change at any time, without notice.

+ Not a recommendation to buy or sell any security

This report does not provide investment recommendations specific to individual investors. As such, the financial instruments discussed in this report may not be suitable for all investors, and investors must make their own investment decisions based upon their specific objectives and financial situation utilizing their own financial advisors as they deem necessary. Investors should consider this report as only a single factor in making an investment decision. All information provided is for informational purposes only and should not be deemed as investment or other professional advice or a recommendation to purchase or sell any specific security.

+ Not an offer to invest in our Fund

This report, which is being provided on a confidential basis, shall not constitute an offer to sell or the solicitation of any offer to buy limited partnership interests of Crossroads Capital Investment Partners, LP (the “Fund”) which may only be made at the time a qualified offeree receives a confidential private offering memorandum (“CPOM”), which contains important information (including investment objective, policies, risk factors, fees, tax implications and relevant qualifications), and only in those jurisdictions where permitted by law. In the case of any inconsistency between the descriptions or terms in this document and the CPOM, the CPOM shall control. The interests shall not be offered or sold in any jurisdiction in which such offer, solicitation or sale would be unlawful until the requirements of the laws of such jurisdiction have been satisfied. This document is not intended for public use or distribution.

+ Other disclaimers

All trade names, trademarks, and service marks herein are the property of their respective owners, who retain all proprietary rights over their use. This document is confidential and may not be disseminated or reproduced without the prior written consent of the Investment Manager.

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Over the last few months, as we have discussed what we believe are our most promising investment opportunities with prospects, a common refrain early on has been something like this: “But that’s not a value stock. I thought you were value investors!” While at times these conversations have been frustrating, we realize the burden of articulating why we believe a particular investment represents mispriced value falls squarely with us. Rather than go into the specifics of one of the names in our portfolio that seems to be generating this friction the most, we felt it would be better to start with a broader problem: Nobody agrees on what “value” means. So, what is value– and “value investing” more generally?

Although remedies in Google's ad tech antitrust trial are still being finalized and likely won’t be implemented until next year, we’re already seeing behavioral shifts at Google (and across the ad tech industry) suggesting that SSPs may realize benefits sooner than expected. Viewed through a real options valuation framework, we believe the market is only just beginning to price in these developments.

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Every so often, a company on our watchlist undergoes a negative event, sometimes self-induced and other times exerted upon it, that creates an opportunity to invest. What’s required to take advantage of the situation quickly is knowledge of the business beforehand (which is why we study businesses every day, despite not investing in them), a network to quickly diligence the issues on the ground, and visibility on a catalyst path that not only resolves the issues in the near term but also sets up market-agnostic returns over a multi-year period. FTAI Aviation is such a company, and the stunning decline in the price of its shares following the Muddy Waters short report is such an event.

Everybody wants to catch the AI gold rush, but who’s making the picks and shovels? If Nvidia’s GPU chips are the raw iron ore, specialized AI cloud computing provider Nebius (NBIS) is building a one-of-a-kind platform for prospectors looking to strike it rich. And with the company's North American expansion plans, soon it won’t be just Europeans relying on Nebius for help. But better yet, what if you could buy shares in this potential AI winner for half off? We think that's exactly what investors can do right now.

Ask any fund manager: Shorting is hard. Many elements make it hard to generate a positive return on shorts.  After all, in the long run most stocks go up. Even worse, when your shorts move against you, they become larger as a percent of NAV, not smaller – compounding the pain of your mistakes. So why do it? And how do we at Crossroads avoid the common pitfalls? Below is a quick primer on our approach, and an example that fits our criteria.


Our shorting framework

First is the why? At Crossroads, we are dedicated to identifying undervalued businesses and strategically positioning our hard-earned capital to maximize returns as the market recognizes their true worth. This cuts both ways, long and short. The question we ask ourselves is “If we can discover great businesses trading at prices that make no rational sense, why can we then not find the opposite?” More to the point, if we can do it successfully and manage our risk well, we are in a much better position to deliver outsized absolute equity returns while minimizing our market risk, certainly vs. traditional long-only equity strategies.

Granted, it’s true that the risk of a short position is theoretically unlimited, and your upside is ultimately capped at 100%. Yet there is more to this long/short story than investors touting that warning typically suggest. In fact, the practical reality is there are a lot more terrible companies than good ones in public markets. Better yet, we think legendary short seller Jim Chanos said it best when he wryly noted, “I’ve seen a lot more companies go to zero than infinity.” For a less tongue in cheek data point, consider that 40% of equities in the Russell 3k exhibit negative absolute returns over their lifetime, with 66% underperforming the index itself. [1]

Another key fact to consider here is that much of our time at Crossroads is devoted to assessing whether a company is a worthy undiscovered compounder or catalyst-driven “special situation” (or both) for long-term investment. Yet, the truth is for every exceptional business priced to reflect the opposite that we uncover and ultimately invest in, there are dozens of subpar ones we discard — the jetsam of our risk-averse investment process, an unavoidable aftereffect of embracing Peter Lynch’s philosophy that 'He who turns over the most rocks wins.' From our perspective then, better to use it to our collective advantage, especially considering we've already sifted through these opportunities to begin with. Why not flip the script and invert our research focus, leveraging the crème de le crème of the worst ideas we’ve come across when we have a pretty good idea of what will make that particular short candidate work – and more specifically, when? After all, time spent on research is invaluable, and the cost of missed opportunities is high. So, by shorting, we leverage our research process to full effect and maximize our opportunity set to profit from Mr. Market’s manic mood, which in turn puts us in a better position to protect our portfolio of carefully selected longs during downturns. Shorts also provide a critical source of funds in difficult times, allowing us to average down on our highest convictions longs at a time when the implied risk-adjusted forward returns are typically the best.

In any case, a beneficial byproduct of flexible thinking in this manner is that it allows us to sharpen our understanding of a business or sector and not get unmoored from determining truth, whichever way it cuts. And indeed, over time we’ve found that our track record in shorting is better than 50/50 and a net contributor to our returns against a backdrop that, let’s face it, has been anything but kind to the average short seller.

Below, we take a few minutes to briefly describe what our process looks like. Experience has taught us that perhaps the best way to begin articulating our investment framework on short selling is to emphasize what we don’t do. Here are three common short selling tactics we tend to avoid as a general rule:


1. We don’t short frauds, although we do short “zeroes.” Lincoln may have been right when he said you can’t fool all the people all the time, but frauds can fool a lot of the people for a lot longer than you might think. We prefer situations where the negatively reinforcing dynamics are so strong that any financial chicanery or other attempts to arrest the “doom loop” only delays the inevitable.

2. We avoid crowded shorts. Risks compound from the action of other short sellers, and the cost of carry can be exorbitant when fishing in crowded ponds. However, if we see a crowded short with a highly probable event path over a defined timeframe, we may look to the options market. Every now and then, we see a name that’s on its last legs, but with the options market pricing in nothing of the sort. In a case like that, rather than shorting the common equity like everyone else, options often times give us a cheaper, less risky opportunity for profit without costing us our mental health in the process.

3. We don’t short based on valuation. This may sound paradoxical, but it’s in alignment with our overall investment philosophy: We look for mispriced opportunities based on insight into a particular business’s qualitative characteristics and future prospects - and what that tells us relative to the market expectations currently embedded in its equity. Valuation in a vacuum just tells us how large a potential share price correction could be if it surprises the market positively or negatively. After all, when something is trading for a price that’s 3x crazy there is no good reason to believe it can’t trade for 10x crazy, i.e., if you don’t have a crystal-clear idea of what will bring those lofty expectations crashing down to earth in the near-term. For shorts, a high valuation on normalized earnings, with our qualitative work pointing to disappointment close at hand, is always the cherry on top – but never the whole sundae.

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So that’s what we don’t do. What do we do? We are looking for businesses undergoing value-destroying change (as opposed to long ideas undergoing value-unlocking change). This change usually comes in the form of new market entrants, structural disadvantages from emerging trends, and an unwillingness or inability to address these threats. This approach lets us short at the outset, and, as the business continues to underperform, add to our position over time (sometimes called ‘laddering’, hence the title of this piece, and no, we don’t mean “short ladder attacks”) Path dependency is critical in shorting, and we believe this approach allows us to be flexible in the face of new developments without getting too offsides.

While some of our shorts have exhibited varying degrees of the characteristics above, our best shorts (or the ones that get us excited) exhibit all these. While we’re understandably quiet on most of our short book, below we take a look at one name that exemplifies our process: ZipRecruiter.


ZipRecruiter: Everything we like in a short, plus an implicit macro hedge

ZipRecruiter (ZIP) claims to be a two-sided marketplace for job seekers and employers that uses a proprietary AI to curate and improve the recruiting process. In actuality, the company is more akin to an employer-paid job advertising channel charging SMBs on a per-job-posting basis that utilizes an inferior business model that requires massive spending in sales and marketing to maintain market share. Structurally, ZIP’s revenue is the first expense cut at an employer when hiring needs fade or a downturn occurs. We could go on, but the disconnect between what ZIP claims to be and what it truly is, couldn’t be more pronounced (qualitatively speaking).

One way this can be gleamed, is by looking ZIP’s leading competitor Indeed, a business that is much better positioned to benefit from the structural trends ZIP claims to be exposed to: digital hiring and onboarding, not just job listings. In a clear sign of superiority, Indeed’s data is now used at the Fed as an input to its labor market analysis. Conversely, the area in which ZIP truly competes, job listings, is a largely commoditized “no moat” niche with dozens of other similarly undifferentiated job sites all fighting for share. Critically some of these sites provide the same service as ZIP but for zero cost to incentivize the use of other more profitable bolt-on services.

To add insult to injury, even a year after the emergence of LLMs (large language models), which offer a cheap way to implement AI solutions, ZipRecruiter still seems intent on spending over 20% of revenue on R&D (~$150M per annum) to refine “Phil,” its AI chatbot. Given that an AI’s improvements come from bigger datasets, Indeed’s larger scale relative to ZipRecruiter makes AI an unlikely basis for ZIP’s long-term differentiation, if not an outright waste of that money. Money that could otherwise be returned to shareholders rather than lit on fire chasing an impossible dream.

Other marks against ZIP include (1) its issuance of high-yield debt to fund a repurchase program seemingly designed to backstop insiders exiting than to create value for ordinary shareholders, and (2) a third-party investor relations team that had no active phone number and that failed to reply to our repeated emails.

At any rate, since the company generates earnings from what is essentially job listings, it’s a bet on the direction of job openings and labor scarcity. When we put on this short in 2023, unfilled open job listing (JOLTs) and labor turnover (quit rates) were ~2x the pre-pandemic norm, unemployment was close to a cyclical low at ~3.7%, and the Fed’s financial tightening was expected to impact the labor market last in a long series of secondary impacts. So here was a company on the cusp of getting hit with a double whammy of micro and macro trends, losing share to lower/zero-cost competitors and a reversion to the mean in job listings partly induced by the Fed.

On valuation, ZIP traded at an unassuming 10x+ adjusted EBITDA (which is mostly stock-based compensation), but this multiple reflected assumptions of unreasonably high margins just as its margins were likely to get destroyed. In short, it was much more expensive than the backward-looking headline valuation suggested. Pair that knowledge with an industry whose trough multiples of earnings in labor market downturns has averaged 5x for peers (historically speaking), and the absolute and relative downside from a one-two punch of multiple compression and decelerating fundamentals looked quite severe under most reasonable future scenarios.

Finally, the stock wasn’t on many people’s radars. Short interest was in the single digits, and cost of carry was nominal.

As such, a short thesis for ZipRecruiter hit all our marks. So how did it turn out?

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‍Outcome and Opportunity

We shorted ZipRecruiter in June of 2023 and exited in August 2024. Over that period the share price declined ~50% from our average entry price to our average exit price. During that time, our thesis largely tracked as expected. That is not always the case, but a welcome situation none the less. While this is in line with what we like to see from our short winners, regulators would like us to remind you that this example is for illustrative purposes. There are certainly times when we are wrong and times when we are right but share price does not decline as much.

As for financial performance since taking our initial position, revenue went down ~45% since the end of 2022, with EBITDA dropping to single digits in dollar amount and margins. Sales and Marketing ran at ~45% of revenue and R&D spending amounted to 25%-30% of revenue. Driving the decline in earnings was a 35% drop in paid employers on the platform, mostly SMBs. This drop was in excess of a ~25% decrease in job openings (JOLTs) during that time period.

The company still seems quite intent on spending over $100M per annum on its AI chatbot “Phil,” but one wonders why they haven’t just bought a ChatGPT subscription and dumped in all their data for 50% of the price. This is half joking and half serious, a company sticking to ‘what has worked’ instead of the newest and most scalable solutions is typically a red flag. Meanwhile, Recruit Holdings (6098.JP), owner of Indeed, is up in both stock price and earnings, as it’s a true enabler of secular digital hiring trends.

Given its depressed earnings, ZIP trades at an elevated 18x adjusted EBITDA, with SBC running at ~80% of adjusted EBITDA and over 100% of CFO.

The consensus holds that ZIP is troughing on its KPIs – and in the near-term it might be right. However, JOLTs are still 20%-25% above pre-pandemic norms, while unemployment is at 4.1%. We may be quite far from a labor market induced economic downdraft. However, in the event of a recession, JOLTs could drop 40% to trough levels with unemployment spiking well above 5%. In that case, a 5x EBITDA valuation on further depressed earnings could result in a share price in the low single digits. So even after a poor couple of years for ZipRecruiter, there’s still plenty of downside given its weak industry position and exposure to labor market trends that have an event path skewed to the downside.


Conclusion

We hope this quick piece helps you understand why and how we short. It’s arguably trendy these days to say that value investing doesn’t work, or shorting doesn’t work. On that last point, recent reports show that short interest, the number of shares borrowed short, are at the lowest levels in decades. Yet we continue to find great opportunities and while they are few, we believe the ability to go short is another arrow in our quiver, helping us to be successful investors over the long-term whatever the future holds. Rest assured we continue to like our odds, at least that much we can say for sure.

On a final note, while this thought piece shows a successful example of short selling, it should be reiterated we’ve had plenty of shorts that were not winners. As always, feel free to reach out to discuss our full track record on shorting, ZipRecruiter, or other opportunities we’re seeing at Crossroads.


Sincerely,
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Ryan O’Connor, Founder and Portfolio Manager

Daniel Prather, CFA, Director of Research



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No guarantee of investment performance

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Last September, prior to the start of the DOJ’s trial against Google’s alleged monopolization of the search market, we laid out a thesis that pointed out investors’ complacency about Google’s antitrust risks in both the search and ad tech trials. While the outcomes of the search trial were hard to handicap (until June 4th, more on that later), we saw a very compelling case and a definable set of outcomes in the ad tech trial – and most importantly, wildly mispriced publicly traded beneficiaries in the event of a Google loss. In both cases, the dominoes are starting to fall, and our thesis is coming to fruition.

The UK housing market is egregiously undersupplied to the tune of millions of homes. However, due to regulatory impediments, high capital demands, cyclicality, and now elevated interest rates, new construction has continually failed to rectify the imbalance. As a result, there is wide support across all levels of the UK government for financial aid to potential homeowners and for initiatives to increase home construction.

Against this backdrop, UK homebuilder Vistry Group (VTY.L) is transitioning to a pure-play “partnerships” business model that combines the financial and land resources of local authorities/housing associations, the central government, and even financial institutions with those of the homebuilder to create a capital-light home construction enterprise at the center of a virtuous cycle for all stakeholders. Unlike traditional homebuilders, “partnerships”model builders pre-sell over 50% of their homes at affordable prices mostly to cycle-agnostic local councils/housing associations, shortening cash collection times and considerably reducing the business’s cyclicality and interest rate sensitivity. Vistry’s shift from a hybrid traditional/partnerships housebuilder to a pure-play “partnerships” business will not only make it the UK’s largest affordable housing manufacturer but will also drastically improve its revenue stability and visibility, return on capital, and earnings potential.

On the eve of Google’s first trial versus the DOJ, in which the government is arguing that the company’s search business is an anti-competitive monopoly, we are more struck by the allegations in a second suit. This second suit brought by the DOJ, which alleges that Google’s dominant ad tech business is an anti-competitive monopoly, should go to trial around January 2024. As we’ll explain below, this is the trial to watch. We believe it has not only a higher probability of success, but also the potential for a greater financial impact on Google, as Google’s ad tech stack powers the rest of its advertising ecosystem.  

Amazingly, most investors seem to be uninterested in analyzing the risk/reward to Google’s business should the DOJ prevail in either of these suits. We’ve seen plenty of investment theses recently presented by sophisticated managers highlighting Google’s moat as a de facto monopoly without any consideration of what might happen should that no longer to be the case. And while some investors are choosing to look this drastic potential change right in the eye, we believe they’re applying elements of historical legal precedents incorrectly, leading to an intriguing endgame that Mr. Market isn’t properly discounting.  

So, if you read this intro and immediately think “The DOJ successful in breaking up Google? That’s never going to happen!” or you’re a shareholder in Google unsure of the trial outcomes, then this letter is for you (especially if you’re a name-brand investor in Google with a history of successfully hedging tail events in your portfolio).

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.

Alphawave IP (AWE) is a semiconductor firm focused on developing high-speed wired connectivity IP for data infrastructure end markets. The complexity at the leading edge of semiconductor design is necessitating a new tool kit for wired connections inside and between chips as traditional methods of scaling down wiring no longer yield competitive results. The company’s founders have extensive knowledge of this niche domain (SerDes) and have quickly developed a unique connectivity IP portfolio, already a year or so ahead of competitors, which has allowed them to rapidly gain share in a short period of time. While the company IPO’d in May of ’21 and have incurred erroneous accusations of illegitimacy/self-dealing in the press, the adoption of their solutions is expected to truly materialize in ’23 as design wins from ’19-’21 scale up into full production. With their lead in connectivity IP accelerating, Alphawave is now undergoing a transformation to provide entire connectivity chiplet design solutions in addition to licensing following the acquisition of OpenFive, a SoC design firm. This transaction should create a scaled firm in the style of Marvell as the adoption of chiplets massively increase the number of connection points within data centers/networks and therefore AWE’s market.

There’s a lot to like about Nintendo, but ultimately we own the stock for one fundamental reason:  its “goldplated” IP portfolio.  Nintendo’s astonishingly lengthy roster of “triple-A” videogame franchises represents a formidable moat that keeps would-be rivals from eating away at the big N’s market share and profits.  And this is one moat that’s likely to last.  After all, no matter how much technological progress other videogame companies make, and no matter how efficiently they run their operations, they will never have Mario, Pikachu, Link, Kirby, Samus, Donkey Kong, or any of Nintendo’s dozens of other widely beloved characters.  Nor will they have the best-selling, industry-leading videogames those characters star in.

To the Members of the Board:

I’d like to share my concerns with you about Transform’s plan to acquire the remaining 41.2% of Sears Hometown and Outlets (SHO) for $2.25 per share. I’m writing on behalf of Crossroads Capital, a Kansas City-based value-oriented investment manager that specializes in uncovering underappreciated, high-quality businesses undergoing transformative, valueunlocking change. I also write to represent a number of other funds and individual shareholders that have expressed interest in this letter.

As a longtime significant shareholder with a multi-year history of carefully studying SHO, engaging in thoughtful conversation with many of its senior executives, and building my own demonstrable track record of public advocacy and support for both management and Mr. Lampert, I think I have some standing to discuss the issues presented in these pages.

Dear Partners,  

If you’re a fan of the 1980 comedy Caddyshack, you’ll no doubt recognize the following poem, which Judge Elihu Smails proudly reads at the launch of his sloop, the Flying Wasp:  

It's easy to grin when your ship comes in
And you've got the stock market beat.
But the man worthwhile is the man who can smile
When his shorts are too tight in the seat.  

Judge Smails is hardly an admirable character. He lacks compassion. He’s quick to take offense. He’s a liar, a cheat, and a hypocrite. Yet his understanding of investor psychology is exactly correct. How many of us grin and pat ourselves on the back for our superior investing acumen when our portfolio is beating the market – only to wince and wonder what we did wrong the moment our outperformance starts to unwind? Few of us, it seems, can smile when our shorts (pants, that is, not positions) are too tight in the seat.  Since late September, the markets have been testing our ability to smile. Elevated valuations, rate hikes, a trade war with China, “quantitative tightening”, and more have coalesced in a perfect storm, sending equities sharply lower. Fear, bordering on panic, has returned.