Great Business at a Great Price: I'm Buying Now

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This article is part of our Rising Star Portfolios series.

It's time for another buy for my real-money Rising Star portfolio. I'm more excited about this purchase than any since lululemon athletica (Nasdaq: LULU  ) , which has recently doubled for me -- and you, if you've been following along.

So, hop in and take a ride as I explain what has me all revved up about Zipcar (Nasdaq: ZIP  ) .

Zipcar provides a car-sharing service in 17 cities and 250 college campuses across North America, the U.K., and Spain. Its 670,000 members simply reserve the car they want online or with their smartphone, open the car with their Zipcard, and take off. Gas, insurance, and 180 miles per day are included in any of the several membership plans. The company claims its members save an average of $7,000 per year over the costs of owning a car.

Zipcar is the top dog and first mover in an important and emerging industry -- and believe me, the industry is very young and has lots of room to grow. Even though the company has a strong presence in major cities, the upside is surprising. Think in terms of tens: Management says 10 million drivers live within a 10-minute walk of a Zipcar vehicle. The company is growing even in mature markets at about 22% per year. And that's in existing markets. New cities and international markets bring even more potential.

Million Dollar Portfolio advisor David Meier has commented that Zipcar's membership model and on-demand services make it like one part Costco (Nasdaq: COST  ) and one part Netflix (Nasdaq: NFLX  ) . Costco members pay a yearly membership fee, and because of that they're sure to take regular advantage of the low-cost retailer. Netflix's model works well because members are engaged in a massive sharing program -- in its case, it collects repeating revenue on DVDs and digital streaming.

Is the drawbridge up or down?
One question I've heard a lot involves Zipcar's competition. How can such a young and small ($570 million market cap) company fend off big names like Ford, General Motors, and Hertz?

I definitely see a moat around the business. For starters, the company has, by far, the largest installed base of users. It has nailed down many of the best locations and parking spots in its existing markets. These things alone create a barrier to entry.

Technology is also a huge plus. The data it collects from users is very valuable and leads to management having the right cars in the right places in order to properly play the demand for a given area, thus increasing revenue per vehicle per day. The data also helps in pricing and creating new products or ideas.

What comes with all of this is a lead in mindshare, user experience, and thus branding. The company calls its members "Zipsters." If its members actually begin calling themselves that, it would mark, as far as I know, only the second company to have its users refer to themselves by the company name. (And, Fools, I hope you know the first.)

The perfect company would be able to grow indefinitely without pesky competitors attempting to steal market share and erode margins. As you know, there is no perfect company. Hertz, Enterprise, and U-Haul already have branded car-sharing services. The aforementioned big automakers are a threat to jump in at any time.

This is obviously a very capital-intensive business, and these deep-pocketed companies have an advantage and flexibility that Zipcar does not. Still, it's comforting that CEO Scott Griffith says one major rental car competitor is starting to pull back because it's not seeing the business it expected.

What's more, Ford has so far chosen to partner with, rather than compete with, Zipcar by providing vehicles on college campuses.

The next Home Depot
Zipcar showed up on my Next Home Depot screen, which is designed to find negative-free-cash-flow companies with a chance to explode like Home Depot (NYSE: HD  ) did in 1985 -- gaining 1,500% over the next 16 years while exhibiting negative free cash flow all along the way.

I'm specifically looking for companies investing heavily into their high-return business, and Zipcar fits the bill. What's more, its cash from operations is now positive and growing quickly, providing further evidence of the strength of the business. This closely matches Home Depot at the beginning of its big run, when management was confident enough in its concept to aggressively fund expansion.

Confidence factor: high
When I bought Lululemon in January of last year, its price had more than doubled from the year before, but I believed it had plenty of room to run. So far, it has. Its latest earnings report showed it reached a cool $1 billion in sales over the past year.

This situation is quite different. Zipcar's price has been cut in half over the past year, and I believe it's in bargain territory. But as with Lululemon, investors aren't seeing past the first impressions and recognizing what a long, sustained run this company is capable of.

I'm seeing it, however, and committing quite a bit to the initial purchase. On Monday I'll be buying $2,000 worth, or about 8% of the total capital I have to work with.

Zipcar is a true Rule Breaker in my book, and will be getting a thumbs-up CAPScall from me as well. David Gardner and his team have their eye on another one as well. Find out more in our special free report, "Discover the Next Rule-Breaking Multibagger."

Fool analyst Rex Moore never forgets to zip. You can follow his writings and ramblings on Twitter. Of the companies mentioned in this article, he owns shares of lululemon athletica. The Motley Fool owns shares of Costco Wholesale, Zipcar, and lululemon athletica. Motley Fool newsletter services have recommended buying shares of The Home Depot, Costco Wholesale, lululemon athletica, Zipcar, and Netflix. The Motley Fool has a disclosure policy.

We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

Read/Post Comments (4) | Recommend This Article (12)

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 March 23, 2012, at 2:09 PM, rhealth wrote:

    Good timing Rex! I think you will look back on this as a fantastic entry price.

    Brett- Long ZIP

  • Report this Comment On March 23, 2012, at 4:30 PM, jordanwi wrote:

    I will never understand MF's obsession with zip car. Perhaps because I could never see myself using the service, nor can I understand how they are going to deal with thousands of depreciating vehicles on their books. It seems like groupon for cars. What's the argument 'for'? I hope you guys do well with it, but I fear it will fail, or fall enough to be an attractive takeover.

  • Report this Comment On March 24, 2012, at 7:14 PM, dbtuner wrote:

    ZIP has no IP and will lose to Avis once Avis decides to go after the consumer market. Avis has 10,000 cars available for Corporate car sharing with 30,000 by year end. They are 3X the size of ZIP. Avis uses IDSY technology and IDSY has 66 patents in this area. ZIP has none

  • Report this Comment On April 09, 2012, at 2:24 PM, clifgray wrote:

    As the price goes lower it is looking like even more of a buy to my but what do you think about all of the values of their fleets going down as time goes on?

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