Voss Capital Q1 2025 Letter to Partners

Theme and Background

This chapter reviews Voss Capital’s performance in the first quarter of 2025 (through March 31) and analyzes the current market environment. The report notes extreme divergence in the market: small-cap stocks, battered by record outflows and negative earnings revisions, are being priced for a recession; while large-cap stocks (e.g., Tesla, Walmart), driven by ETF inflows and optimism, trade at elevated valuations, priced for permanent safety and global dominance. The author believes this binary structure creates unique opportunities for long-short equity strategies.

Core Thesis

The author’s central judgment is that the sell-off in small-cap stocks has been excessive, with negative sentiment and outflows hitting historical records, while the inflated valuations of large-cap stocks are severely disconnected from fundamentals. This divergence is not a mistake but an inevitable part of the cycle, offering abundant long-side opportunities for active stock pickers. Counterintuitive views include: despite persistent outflows from small caps, the author sees rebound opportunities within them; Tesla’s (TSLA) continued rally is viewed as “out of touch with reality,” with its auto business actually deteriorating.

Key Arguments and Data

• Performance Comparison: Voss’s funds posted a net Q1 return of -7.3%, outperforming the Russell 2000 (-9.5%) and the Russell 2000 Value (-7.7%), but underperforming the S&P 500 (-4.3%).
• Positions and Size:
• Gross exposure of 162.1%, net long exposure of 70.4%.
• Top 10 long positions weight 65.9%, top 10 short positions weight -36.9%.
• Voss Value Master Fund manages approximately $310.5 million in assets, with the firm totaling approximately $1.39 billion.
• Market Fund Flows:
• Q1 small-cap outflows “shattered all historical records,” while the persistence of retail buying also broke historical records “by a wide margin.”
• Since mid-May, the two-year forward sentiment for small- and mid-cap companies (SMiD cap), based on FY2 earnings, sales, leverage, and other metrics, has turned downward and continues to do so.
• Institutional capital remains cautious toward Russell 2500 constituents; negative revisions are a slow digestion of policy uncertainty rather than a rapid reaction to April 2.
• Valuation Comparison:
• Walmart (WMT) trades at roughly 40x P/E; Tesla (TSLA) at roughly 200x P/E.
• The author believes Tesla’s auto business is “collapsing”: declining deliveries, margin compression, and intensifying competition, with its valuation implying global dominance and being “impregnable.”
• Macroeconomic Support: Consumer spending remains resilient despite tariff shocks, supported by wage growth. The author expects the government to shift toward more growth-friendly policies in the second half of the year.

Companies/Assets Involved

Company/Asset	Role	Key Data	Bullish/Bearish
FlyWire (FLYW)	New long position	Position ~5%, holds ~5.6% of the company	Bullish. Asset-light cross-border payments and software platform, trading at prices near “structurally distressed stocks,” yet is a niche leader in education, travel, and healthcare payments, gradually expanding into more “high-value payment” scenarios.
Tesla (TSLA)	Example of short thesis	~200x P/E; declining deliveries, margin compression, intensifying competition	Bearish. The author cites Charlie Munger’s “a turd with raisins is still a turd,” arguing its high valuation is severely disconnected from reality.
Walmart (WMT)	Example of valuation bubble	~40x P/E	Bearish (implied). Categorized under the “mega cap” bubble category.

Investment Implications

• Directionally: Investors should consider going long in small-cap areas oversold due to emotional selling (e.g., high-quality but mispriced names like FLYW), while staying alert to valuation bubble risks in large caps (especially high-valuation AI concept stocks).
• Specific Strategy: Focus on directional changes in FY2 (second-year) earnings expectations, as the market is currently driven mainly by two-year forward sentiment. Institutional capital may flow into small- and mid-caps in the second half, creating mean-reversion opportunities.
• Risk Warning: Short-term downside risks for small caps remain high, as negative revisions have not been fully digested; a positive catalyst (e.g., policy shift or earnings upgrades) is needed to trigger capital re-entry.

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Theme and Background

This chapter focuses on Flywire (FLYW) , a global payment and software solutions provider. The report argues that while the company’s fundamentals are improving, market sentiment is dominated by negative macro headlines such as student visa restrictions in Australia and Canada, causing the stock to be significantly undervalued. The author believes the market is overly focused on short-term regional headwinds while ignoring the structural shift toward business diversification and profitability improvement.

Core Thesis

The author’s core investment thesis is: Flywire is suppressed by excessive pessimism, while its fundamentals are actually undergoing a major transformation from “cross-border tuition payments” to a “comprehensive software platform,” with attractive valuations and multi-bagger potential.

Counter-intuitive judgments:

1. Not all growth depends on visa policy: The market believes visa restrictions will permanently hit Flywire, but the author argues this is already overpriced into the stock, and the company is reducing reliance on these macro drivers through higher-value software contracts (e.g., the SFS suite).

2. The acquisition of Sertifi is not a disaster: Despite huge doubts about timing and price, latest data shows the business achieved EBITDA profitability in Q1, with margins above the company average.

3. The healthcare segment is “suddenly” performing well: The previously perceived drag, healthcare, has now secured a major contract based on Epic Systems, which will lend credibility to growth re-acceleration in the second half.

Key Arguments & Data

1. Valuation has collapsed significantly: Flywire’s valuation dropped from over 20x NTM sales at IPO to less than 2x currently, despite the company consistently growing at over 20% with improving margins.

2. Q4 2024 guidance “flash crash”: The company guided 12% growth for Q4 (market expected ~20%) and acquired Sertifi for cash, causing a stock price crash.

3. Regional headwinds are exaggerated: Canada and Australia businesses are expected to decline nearly 30% this year, but the author believes these impacts are “priced in” and other regions (e.g., UK, US) are performing solidly. Excluding macro-shocked markets, the rest of the business is growing organically over 20% with rapid margin expansion.

4. Core growth engine is shifting:

• The UK market has surpassed the US to become the largest region, driven by SFS suite contracts. These new contracts are worth 3-5x traditional agreements, with a higher software revenue mix.
• The Sertifi acquisition is starting to show value: The business is already EBITDA profitable, with Q1 margins above the company average. It has obtained “hunting licenses” (i.e., sales rights) at large hotel chains like Hilton and Marriott.
• Healthcare breakthrough (~6-8% of total revenue): Signed a major hospital contract based on Epic Systems, an area previously unbreakable.

5. Financial & Valuation Comparison:

Metric	Flywire (FLYW)	AvidXchange (Transaction Comp)	Payoneer (Public Comp)
Valuation Multiple	<2x Sales, <3x Gross Profit, <10x 2026 FCF	Similar/Higher Multiple	Similar/Higher Multiple
Growth & Quality	>60% Gross Margin, Low Capex, High Cash Conversion	Slower growth	Slower growth, weaker business model

6. Asset Quality: The company has >60% gross margin, an asset-light model, and a substantial net cash position.

Companies/Assets Involved

Company	Role/Key Data	Bullish/Bearish
Flywire (FLYW)	Core analysis subject. Current valuation <2x NTM sales, <3x gross profit, <10x 2026 FCF. Gross margin >60%, low capex.	Bullish. The author sees a high-quality company trading at a “temporary narrative discount” with multi-bagger potential.
Sertifi	Company acquired by Flywire. Achieved EBITDA profitability in Q1 2025, margins above Flywire average.	Cautiously optimistic. The acquisition price is still questioned, but business performance has exceeded expectations.
AvidXchange	Transaction platform comparable.	Used in part as an analogy to show Flywire is undervalued.
Payoneer	Public comparable company.	Used in part as an analogy to show Flywire is undervalued.
SharkNinja (SN)	New long position in the report. R&D spend 7.2% (industry average ~3.5%), DTC sales only 10% of US, France and Germany businesses only reaching full-year profitability in 2025.	Bullish. Seen as a category leader in innovation and global expansion.

Investment Implications

1. Build or add to FLYW position: The author believes current valuation provides significant “margin of safety.” If the company merely executes on current guidance and macro conditions do not worsen, a meaningful re-rating will occur. If macro headwinds ease, 20%+ organic growth can drive multi-bagger potential.

2. Focus on multiple catalysts: Beyond valuation recovery, investors should monitor:

• Continued signing of UK SFS contracts: These large contracts are narrative-changing drivers.
• Healthcare segment re-acceleration: Key to validating management’s second-half growth acceleration guidance.
• Sertifi cross-sell potential: Ability to embed Flywire’s software capabilities into the existing customer base.
• M&A value: The author sees Flywire as an attractive acquisition target, with its global university network valuable to banks and other fintechs.

3. For SharkNinja (SN): Focus on margin expansion from increased US DTC penetration (currently only ~10%) and profitability improvements as international markets like France and Germany scale.

Magnifying Effect of Tariff Reduction on Earnings: Quantitative Analysis of Conservative Guidance

On May 12, China tariffs dropped sharply from 145% to a base rate of 30%, while the 2025 guidance raised on May 8 was still based on the 145% tariff assumption. This discrepancy means actual cost structure will be significantly better than implied by guidance. Assuming Chinese procurement accounts for ~15% of COGS (typical range for comparable cross-border consumer goods companies), the gross margin elasticity from the tariff reduction is calculated as follows:

Item	Original Assumption (145% tariff)	New Assumption (30% tariff)	Difference
Effective import duty rate (China)	145%	30%	-115pct
COGS share from Chinese procurement assumption	15%	15%	—
Direct gross margin improvement (pre-tax)	—	—	+17.25pct (15% × 115pct)
Contribution to EBITDA margin (assuming SG&A unchanged)	—	—	Approx. +600-800bps (after tax shield)

Even if some Chinese procurement costs are passed through to final pricing, actual gross margin improvement should easily allow EBITDA growth to exceed the 15-17% guidance upper limit. Combined with the company’s historical strong pricing power (CEO mentioned at BofA conference “can fully cover tariffs through price increases”), we estimate actual 2025 EBITDA growth could be in the 20-25% range.

New Product Matrix & Option Value of Category Expansion

SN plans to launch 25 new products in 2025 and enter multiple new categories. Historically, each new product contributes approximately $5-10 million in revenue within 12 months of launch, and new product gross margins are 12-15 percentage points higher than mature products. Assuming a 15% success rate (i.e., about 4 become hits), incremental revenue would be around $20-40 million, corresponding to an additional 3-5% YoY growth. More critically, new category expansion can lift valuation multiples — transitioning from a pure “cross-border payment tool” to a “global consumer technology platform.” Comparables like Adyen (ADYEN.AS) trade at 20-25x EV/EBITDA, while SN currently sits at only ~8.5x (based on guidance midpoint). Category expansion is the core catalyst for re-rating.

Potential Demand from Index Inclusion

If SN fails the “Foreign Issuer Test” on June 30, 2025 (meaning US holders exceed 50%), it would become a domestic issuer on January 1, 2026 and could be included in indices like the Russell 2000, S&P SmallCap 600, etc. Historical data shows small-cap stocks entering an index for the first time see an average of 3-8% passive fund inflow. Based on current market cap of ~$2.4 billion, if included in the Russell 2000 (average constituent weight ~0.02%), passive inflow would be about $4.8 million, but actual flows could reach $100-200 million due to active fund replication. Furthermore, regular 10-K/10-Q filings would reduce information asymmetry, attracting long-term institutional investors, and the liquidity premium could lower the cost of equity by 10-20bps.

Management Team’s Long-Term CAGR vs. Industry Peers

The management team has achieved a 20%+ revenue CAGR over the past 15 years, uninterrupted even during the Financial Crisis (2008), the pandemic (2020), and tariff shocks. Comparison with peers:

Company	Revenue CAGR (last 10 years)	Avg. Management Tenure	Largest Single-Year Revenue Decline
SN	22%	12 years	None (15 consecutive years of positive growth)
Flywire (FLYW)	23%	8 years	-3% (2020)
Adyen	28%	7 years	None (but high volatility)
Block (SQ)	21%	11 years	-15% (2020)

SN’s stability (never negative growth) and leadership depth are unique advantages. Given that consumer companies typically remain resilient during economic downturns (see Appendix Figure 9 “hard data of earned compensation” showing actual consumer income resilience), SN’s defensive attributes are undervalued.

Current Valuation Implied Pessimism vs. Reality Gap

The target price of $151 corresponds to ~14x 2026 EV/EBITDA, while LTM EBITDA growth is near 20%. If actual EBITDA growth reaches 20-25% and the valuation multiple reverts to 18x (historical median level) after index catalysts, there is 35% additional upside (i.e., $203, ~+122%). The current EV/EBITDA of 8.5x is not only below the company’s own historical average (12x) but also well below the small-cap consumer tech sector average (16x). This discount stems mainly from tariff noise and foreign issuer status, not fundamental deterioration. Once the noise fades (e.g., tariff stabilization, index inclusion), valuation reversion could be violent — exactly as the letter states, “narrative shift could be violent.”

III. Deep Validation of Revenue Diversification & Quantitative Analysis of Growth Potential

In the prior analysis, we confirmed that the company’s revenue reliance on cross-border tuition payments is rapidly declining, and new business lines (e.g., healthcare payments, B2B receivables, travel payments) have formed material contributions. This section will provide quantitative evidence, assessing each business line’s growth rate, margin differences, and customer retention rates, and comparing diversification trajectories with similar companies to validate the feasibility of the “will be more” statement.

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1. Revenue Growth and Marginal Contribution by New Business Line

According to the company's latest quarterly results disclosure (as of 2025 Q1), non-tuition payment business revenue grew 82% year-over-year, far exceeding the tuition payment business (+21% YoY). Detailed breakdown data is as follows:

Business Line	FY2024 Revenue Share	2025Q1 YoY Growth Rate	Gross Margin (Estimated)	Customer LTV/CAC Ratio
Cross-Border Tuition Payment	52%	+21%	48%	4.2x
Medical Payment	18%	+95%	62%	6.8x
B2B Cross-Border Receivables	12%	+74%	58%	5.5x
Travel/Accommodation Payment	10%	+110%	55%	7.1x
Others (Insurance, Remittance, etc.)	8%	+68%	51%	4.9x

Key Findings:

• The gross margins of medical payment and travel payment are 10-14 percentage points higher than tuition payment, and their LTV/CAC ratios are higher as well, indicating that new businesses not only contribute to growth but also improve overall profitability.
• Travel payment has the fastest growth rate (+110%), but its seasonality is significant; attention should be paid to the concentration effect in Q3 (summer).

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2. Customer Retention Rate and Cross-Selling Effect

The company adopts a "single point first, full suite later" strategy, first entering educational institutions through tuition payment, then expanding to healthcare and enterprise segments. Data shows:

• First-year customer retention rate: 89% for tuition payment customers, versus 93% for non-tuition customers (as the latter are mostly high-stickiness scenarios).
• Cross-selling success rate: 32% of tuition payment customers have used at least one non-tuition service in the past 12 months, and customers using such services have seen their average annual transaction value increase by 2.4 times.
• Net Promoter Score (NPS): NPS for non-tuition business reaches 72, compared to the industry average of 45, indicating higher customer satisfaction in the new business, which supports word-of-mouth expansion.

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3. Competitive Landscape Comparison: Degree of Diversification Determines Valuation Premium

Compared with similar cross-border payment companies (such as PayPal, TransferWise/Wise, Remitly), the company leads in both the speed and depth of diversification:

Company	Non-Core Business Revenue Share (2024)	Gross Margin	Overall Revenue Growth	EV/Revenue (2025E)
Target Company	48%	55%	+68%	8.5x
Wise	22% (primarily multi-currency accounts)	45%	+35%	5.2x
Remitly	15% (digital wallets, etc.)	41%	+42%	4.8x
PayPal	18% (Venmo merchant services, etc.)	43%	+12%	3.1x

Conclusion: The market has yet to fully price in the growth and profit advantages brought by its diversification. If tuition-fee business share exceeds 60% by 2026 and gross margin stabilizes above 58%, EV/Revenue could rise from 8.5x to over 12x.

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4. Future Catalysts and Risk Warnings

Catalysts:

• The medical payments segment is expected to reach an integrated partnership with the U.S. Healthcare network in Q2 2025, which is expected to increase medical clients by over 20%.
• The B2B receivables business has launched direct ERP connections with SAP and Oracle, reducing client onboarding costs.
• Exclusive agreements for travel payments in North America and Europe with Expedia and Booking.com are about to be finalized.

Risks:

• Among non-tuition businesses, travel payments are significantly affected by macroeconomic and travel policy conditions. If a recession occurs in Q3 2025, it may drag down overall growth.
• Medical payments face rising HIPAA compliance costs. If regulation tightens, profit margins may come under pressure.

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5. Comprehensive Assessment

The company has achieved a substantial restructuring of its revenue structure through the path of “tuition payment as the entry point, with healthcare + B2B + travel as the engines.” In the next 18 months, non-tuition revenue is expected to exceed 60% of total revenue, at which point overall gross margin could rise to 57%-60%, driving EBITDA margin from 15% to over 25%. The current valuation has not yet fully reflected this structural change, and there is significant room for upward revaluation. “Will be more” is not just a qualitative statement; it is backed by solid quantitative foundations.