Rising Star Buy: Zipcar

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This article is part of our Rising Star Portfolio series.

America's long-standing love affair with the automobile may be fading into something closer to a marriage of convenience -- occasionally comfortable and necessary, but nothing close to daily romance.

The fact that the way we view transportation may be changing dramatically is just one of the reasons I'm purchasing shares of car-sharing company Zipcar (Nasdaq: ZIP  ) for my socially responsible Rising Star portfolio.

The business
Cambridge, Mass.-based Zipcar boasts "Wheels When You Need Them." Founded in 2000, Zipcar provides self-service vehicles to 650,000 members known as "Zipsters" in 15 major metropolitan areas and 250 college campuses in the U.S., Canada, and the U.K.

Zipcar started off providing its temporary car use service in major metro markets Boston, New York, and Washington, D.C. Since then, it's expanded to San Francisco, Chicago, Seattle, Philadelphia, and other major markets.

First-mover advantage gives Zipcar an edge over other car-sharing services. So far, it has more than 9,500 cars ready and waiting in its major metro markets, and in its IPO prospectus, it boasted that no other service provides the same size, diversity, and market penetration that its fleet represents.

A mission that emphasizes sustainability gives Zipcar a comfortable spot in this portfolio, too. Zipcar estimates that each Zipcar shared removes 15 personally owned vehicles from the roads. The company also says that with 10% of the population expected to ditch car owning and commit to car sharing, billions of gallons in gas and oil will be saved.

Why I'm buying
Zipcar's stock price has been halved since its April IPO. That reduces some of the risks inherent in its historic lack of profits and the fact that it's in the very early stages of its business. I felt wary of this IPO in April, but I'm much more comfortable at the current price.

Zipcar has consistently increased its revenue over the last several years. Meanwhile, in November it reported a surprise quarterly profit of $0.02 per share (although it cut revenue estimates for the full fiscal year).

Clearly car sharing, as opposed to car owning, is catching on with more people than conventional wisdom might deem possible. What's caused this gradual but real change of heart?

Congested urban areas make it difficult, and occasionally even annoying, to own a car. Automobiles' value depreciates the moment they're driven off dealerships' lots. Add in factors such as high gas prices, parking fees, personal property taxes, state inspections, and regular maintenance, and cars could be described as a money pit.

Zipcar estimates that its members save an average $500 per month compared to car owners. Regardless of the green factor, many urbanite consumers could catch on that this method of only accessing a car when it's truly necessary could save them some serious cash.

This upstart has ample room for growth. If its business accelerates according to plan, its growth could be absolutely stunning. Zipcar has identified more than 100 major markets across the globe as attractive. Zipcar is also tackling Europe aggressively, having recently named a new president of European operations.

And now, the risks
Zipcar could face some serious speed bumps, and investors shouldn't take the risky nature of this investment lightly.

It may be the first mover with a brand that's synonymous with car sharing, but it hasn't lacked hitchhikers latching onto its idea. Not only does Zipcar compete with other car-sharing networks and traditional car rental companies like Hertz (NYSE: HTZ  ) and Avis (NYSE: CAR  ) , both of which have launched car-sharing products, but Zipcar also competes with grassroots, peer-to-peer car-sharing services, which are also gaining traction.

Furthermore, Zipcar is up against an engrained theme: Americans adore their automobiles. As far as sustainability goes, the major car companies are cranking out green automotive alternatives that certainly didn't begin and end with, say, Toyota's Prius. Tesla's (Nasdaq: TSLA  ) entire business revolves around sustainable electric vehicles, in fact. (Read why I didn't purchase Tesla for this portfolio here, although it was a contender at one point.)

When I first purchased shares of Solazyme (Nasdaq: SZYM  ) for this portfolio, I noted one safety measure: The biofuels company hadn't taken on a hair-raising amount of debt before it went public, a common issue with IPO companies and start-ups. Zipcar, on the other hand, had $95 million of debt outstanding as of December 2010; one of the reasons it went public was to reduce its indebtedness.

This leads us to the fact that Zipcar's business is very expensive, requiring heaps of capital. Part of Zipcar's advantage could be described as a double-edged sword, in fact. While many consumers are clearly realizing that if they ditch car ownership and utilize Zipcar's services, they're saving big money, that fact works against Zipcar's profitability as it builds out its fleet of automobiles and attempts to keep them well-maintained.

Foolish bottom line
I know other Fools like Zipcar, too; Foolish analyst David Meier bought shares for his Trends and Trades portfolio, and my colleague Annie Feldman recently pointed out its promising attributes for a greener portfolio. The Foolish community members who visit my discussion board have brought up Zipcar's merits several times, too.

Zipcar is positioned to capitalize from a major shift in American consumer spending attitudes and habits, as well as the growing sustainability trend. Its first-mover advantage gives even more fuel for its plans. Fools, start your engines.

Share your thoughts on Zipcar in the comments box below, or add these companies to your watchlist to track the trends:

Alyce Lomax owns shares of Solazyme in her personal portfolio. The Motley Fool owns shares of Zipcar, Hertz Global Holdings, Wal-Mart Stores, and Solazyme. Motley Fool newsletter services have recommended buying shares of Wal-Mart Stores, Zipcar, and Tesla Motors. Motley Fool newsletter services have recommended creating a diagonal call position in Wal-Mart Stores. 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.

Read/Post Comments (12) | Recommend This Article (33)

Comments from our Foolish Readers

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 January 25, 2012, at 11:52 AM, terracomm wrote:

    yeah, zip saves its customers money.

    to realize this, though, they're losing money.

    and the market knows it.

  • Report this Comment On January 25, 2012, at 12:45 PM, jennyswave25 wrote:

    I truly like the idea of zipcar. I know people in DC that use it frequently and rave about its convenience, accessibility, affordability, yadda yadda. Even so, I'm not sure I can get behind it yet; I feel it's still in its infancy and has growth points I'd like to see met. That being said, I'll most likely wait too long to jump aboard and kick myself later once their stocks are no longer affordable for me to buy in.

  • Report this Comment On January 25, 2012, at 1:02 PM, DJDynamicNC wrote:

    Zipcar is the only thing that'll get me back behind the wheel. A car is a miserable blackhole for money considering it spends 80% of its life sitting around rusting. A zipcar membership makes a lot more sense to me. I'm in no hurry to get one - cars are damn dangerous and I am not eager to drive again - but I could definitely see signing up once my wife and I decide to have kids (we've already discussed Zipcar for precisely that situation, in fact).

    There's a general trend towards increased urban living and reduced car use which means Zipcar is facing growth in its target demographic. Whether it can last long enough to realize a profit from that growth is an open question, but it's a worthwhile risk I feel.

  • Report this Comment On January 25, 2012, at 1:06 PM, DJDynamicNC wrote:

    ^^^ I should clarify that "a car sharing service" would get me behind the wheel. Zipcar is the only one I'm familiar with but I'd likely comparison shop if I were actually making ready to sign up.

  • Report this Comment On January 25, 2012, at 1:45 PM, BOSPAT wrote:

    Zipcar is a great company that provides a needed service to those of us that live in an urban setting. They have cars located at many convenient locations in my city (Boston) and the whole process is easy to use. Considering how much a person would pay in insurance (cities are the worst), gas, wear and tear and both parking cost (should you rent a space) and hassle (I have a resident sticker and need to find my own spot everyday) Zipcar is a perfect alternative.

  • Report this Comment On January 25, 2012, at 8:57 PM, lanceim59 wrote:

    Zipcar is another loser stock. The consumer base is so limited. The growth rate is extremely slow. Profit margins are minimal. Perhaps most of all, fuel will be dirt cheap in the future whether it's lng(liquified natual gas), microalgae biofuel (from Solazyme) or even electric. So everyone and their grandmas could afford their own car. The bottom line is, no one wants to drive a Zipcar when they can have their own car.

  • Report this Comment On January 25, 2012, at 11:43 PM, mikecart1 wrote:

    Zipcar will never win. I did a research paper on this company when I was getting my Masters degree. This company's fundamentals are poor at best and the business model is a catastrophe. That on top of the lousy incentive to consumers, the limited marketplace for these vs. public transportation, and the costs, Zipcar is just a matter of time before going bankrupt for good.

  • Report this Comment On January 27, 2012, at 8:30 AM, dbtuner wrote:

    How can a company with 9000 cars have 2/3 of the market cap of Avis which has almost 300,000 cars? Zipcar business model is to sell to college students and urban dwellers; two demographics that don't have money. It might be a cool idea, but it won't make enough money to propel the stock. Way, way overvalued and over hyped.

    This is a modern day

    Avis on the other hand, has 10,000 cars active now with a target of 30,000 by June. They will target business users.

  • Report this Comment On January 27, 2012, at 9:19 AM, FutureMonkey wrote:

    Zipcar's focus on college students and urban dwellers is essential to long term success - on the obvious level that they are the low hanging fruit for a car sharing service, but also because this is a segment of the population that doesn't have the ownership mentality of the widerswath of the American population. Overcoming the ownership mentality of established home owners, car owners, etc will be a harder uphill battle - I know I'd wrestle with the idea myself no matter how much financial sense it makes to give up my car. Hooking people that have never owned a car and retaining them is the smartest early play. They will also be the cheapest advertisers out there if they successfully demonstrate a successful lifestyle that is $500/month less than their car owning peers.

  • Report this Comment On January 27, 2012, at 2:26 PM, TMFLomax wrote:

    Thanks for all the thought-provoking feedback, folks! I'm finding both the pro and con thoughts very interesting.



  • Report this Comment On February 07, 2012, at 9:42 PM, Estrogen wrote:

    If I was a downtown dweller, I could see the application. Also be fun to test drive different vehicles. $8-$12/hr to drive a car when needed certainly seems like a good deal. Company really isn't profitable and not sure that growing will get them there.

    I'm not sold on idea from a business perspective and I don't see it being ubiquitous from a consumer perspective.

  • Report this Comment On February 09, 2012, at 5:06 PM, XMFHRFool wrote:

    My roommate does not have a car (thank goodness because my Alexandria condo only comes with one parking spot) and uses zipcar at least a couple times a week to run errands, go on dates, and other activities that the metro is just not the greatest option for.

    My car permanently broke down in the early part of 2011 and I used zipcar extensively for 4 months while I was deciding whether or not to invest in another vehicle. As someone who is 41 and has always owned a car, and owns that one parking spot, I finally gave in and bought a used Jeep. But zipcar was great while I was without. I also think it's a great option for renting a car while on business or vacationing in a major city if you're only going to need one for a occassional trips (a weekly rental + hotel parking can be expensive!!)

    I was very excited to see them IPO because I think it's a great company, great concept and I really like what I know of their down-to-earth CEO. Thanks to your article, I may be investing as soon as Marthetron tells me that it's okay :-)

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