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Zipcar Sizzles in IPO

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There aren't a lot of IPOs I anticipate years in advance, but ever since hearing about Zipcar (Nasdaq: ZIP  ) I've waited to see how this short-term car rental shop would perform on the market. So far, so good as the stock shot 56% higher than its $18 initial price yesterday.

What in the world is a Zipcar?
Zipcar is like a car rental club that allows you to rent a car for short periods of time. The cars are available in public places and when you go to pick up your reserved car you just flash your RFID Zipcard across the card reader on the windshield and you're off and running.

For those of us who live in urban areas that don't require a lot of driving, this is a perfect option and the fast expansion of the business shows just how popular it has become.

Since 2000 Zipcar has grown to 560,000 members in 14 major cities and 230 college campuses across the country. That growing base of users has sent revenue skyrocketing from $30.7 million in 2006 to $186.1 million in 2010. But like most fast-growing companies, that has also meant a net loss of $14.1 million last year.

Seeing green
One of the sales pitches for Zipcar is the "green" experience. Not only does the company provide fuel-efficient vehicles like the Toyota (NYSE: TM  ) Prius and Honda (NYSE: HMC  ) Insight Hybrid at my local Zipcar stations, it means driving less. Providing people with a cheap alternative to car ownership actually reduces people's overall driving.  According to company data, 90% of Zipsters drove less than 5,500 miles per year, saving an estimated 32 million gallons of crude oil.

Foolish bottom line
As exciting as Zipcar is, the issue for the company is the capital-intensive nature of owning vehicles. To build the business, Zipcar has also been spending increasing amounts of money on SG&A expenses, keeping it at a loss from operations. That will have to turn around for this to become a good investment long term.

Competitors like Google- (Nasdaq: GOOG  ) backed RelayRides see this market as an opportunity as well, so the business could get crowded. Zipcar's high growth rates could attract a lot of competition. One member of RelayRides' board estimated that the entire car sharing market could amount to $12.5 billion worldwide. That's a figure that's sure to draw in some competition.

Our friends at Market Foolery are cautious on the stock right now, and considering the company's net loss, this scorching stock may have to cool off before investors should jump in. But that doesn't mean it isn't worth keeping an eye on. I've added Zipcar to My Watchlist and you can too to by clicking here.

Fool contributor Travis Hoium does not have a position in any company mentioned. You can follow Travis on Twitter at @FlushDrawFool, check out his personal stock holdings or follow his CAPS picks at TMFFlushDraw.

Google is a Motley Fool Inside Value choice. Google is a Motley Fool Rule Breakers selection. The Fool owns shares of Google. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On April 18, 2011, at 10:43 AM, nrogers61 wrote:

    I recently cancelled my ZipCar membership and would not invest in the company. There's really one simple reason for this. The delivery model is fundamentally flawed. As more customers sign on to the service, the availability of cars deterioriates to a point where you have many unhappy customers who cannot access the vehicles. This is especially true on the weekends. In order to reach profitability, ZipCar must grow membership signifcantly higher than they have today, but this will only make things worse for people looking for cars, especially in urban areas. I would love to see the utilization models and how ZipCar plans to deal with this issue. It's a supply and demand scenario where demand extremely variable, and supply is almost completely static. Not good for business if you ask me.

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