Why Zipcar's a Buy

Zipcar (Nasdaq: ZIP  ) has been one of the more controversial stocks to come on the market over the past few years. The company helped pioneer the car sharing industry in America, and along with it is challenging our entire notion of transportation. This kind of bold approach to how we get around hasn't always worked out in the past -- just think of the Segway, known as the "Ginger" and the "IT" prior to its unveiling. Steve Jobs called the human transporter "as a big of a deal as the PC," and others said it would be more important than the Internet. Ten years after its invention, the revolutionary vehicle is a favorite among park police officers and fanny-pack tourists; not exactly the transformative invention that the Internet was.

Zipcar is not a new machine, however, just a different way to use an old one. Unlike Segway, the car sharing innovator accepts that the automobile is here to stay. That's what our cities and suburbs are designed for after all, as anyone brave enough to bike through downtown traffic knows.

Considering the high cost of car ownership, booming urban populations, and skyrocketing gas prices, Zipcar seems like a service that fits with the zeitgeist. It's environmentally friendly and takes advantage of the Internet and a wide customer base the way Netflix did. Before singing the praises of Zipcar, though, let's take a look at some of the drawbacks of the transportation company.

On your left
Based on the pitches of CAPS community members, the biggest criticism of Zipcar seems to be potential competition. While the company was a first-mover, traditional players like Hertz (NYSE: HTZ  ) and Avis (Nasdaq: CAR  ) are big enough to simply bully Zipcar out of the way, the bears argue. Sensing a threat, Hertz has already moved in on Zipcar's territory with its own On Demand service, which offers options the first mover does not such as one-way rentals at some locations, which allows customers, for instance, to drive themselves to the airport. Hertz On Demand also lacks Zipcar's membership fees.

Hertz recently unveiled plans to equip its entire 375,000-vehicle U.S. fleet with technology so they can be used for car sharing by the middle of next year. The problem, however, is that the car sharing battle doesn't boil down to merely fleet size. It's a question of location, and Zipcar seems to have a solid head start. For example, Hertz on Demand offers just 22 locations in Manhattan, while Zipcar has that many in just one New York neighborhood.

Hertz and other traditional car rental companies are not in the greatest shape to expand into new markets. Hertz has a negative tangible book value and over $11 billion in debt on its books, nearly twice its market cap, while Avis carries a similar debt burden.

Finally, as a disruptor, Zipcar holds an advantage over traditional car rental companies the same way Amazon.com does over Barnes & Noble and Best Buy. While those brick-and-mortar retailers have expanded into online sales, they still aim to preserve their core retail businesses, while Amazon is able to avoid the costly labor and real estate expenses that come with brick-and-mortar locations. Similarly, Zipcar's model eliminates those costs, and it doesn't need to worry about car sharing cannibalizing its core business.

The P2P threat
Just as Zipcar disrupted the car rental market, a new kind of car sharing threatens to leapfrog its model. Peer-to-peer car sharing, or P2P, takes Zipcar's idea one step further by outfitting privately owned cars so a neighbor could rent them as they would a Zipcar. But while the P2P model could be an improvement on Zipcar's, none of the companies' offerings are close to its size, and even the biggest ones like RelayRides and GetAround are active in just a handful of markets.

Similar to Amazon, which has grown to dominate online retail in part by acquiring competitors like Zappos and diapers.com, Zipcar has flexed its muscle in the car sharing market by snatching up rivals like Avancar, Streetcar, and Flexcar. The company showed a similar interest in the P2P sector with a recent investment in Wheelz, a west coast peer-to-peer car sharing service. If P2P continues to be promising, it wouldn't be surprising to see Zipcar make a full acquisition of one of the providers.

Cha-ching
While there are plenty of reasons to like Zipcar, including its first-mover advantage and disruptor status, the best argument for buying is in the numbers. While overall the company is only barely profitable, its expansion efforts obscure the true moneymaking potential of its model. In its established markets -- Washington, New York, San Francisco, and Boston -- Zipcar is posting substantial margins. For the fourth quarter, operating profits were 28% and 23% for the year in those cities, meaning 2011 operating profit from those four markets was about $31 million. As it expands, Zipcar will continue to invest cash in these types of dense cities, establish a dedicated user base, and aim to achieve similar profit margins across the board.

With a steady growth rate, promising market opportunities, and a partnership with Ford (NYSE: F  ) , which has agreed to supply vehicles at 250 college campus locations, there's plenty of reasons to like Zipcar. From this perspective, it looks like there could be miles of open road in its future.

Kick it up a notch
As a first-mover and disruptor, Zipcar is a classic rule breaker, Fool co-founder David Gardner's favorite kind of investment. This philosophy has led him to returns of 1,000% or more in investments such as Marvel, priceline.com, and Green Mountain Coffee Roasters. Now, he's found a new company he thinks will trounce the market. It's a medical device producer with a razor/razor blade model that's just getting started. Learn the name of this hot stock and why it's got so much potential in the Fool's latest free report: "Discover the Next Rule-Breaking Multibagger." You can get your free copy by clicking right here.

Fool contributor Jeremy Bowman owns no shares of the companies mentioned above. The Motley Fool owns shares of Hertz Global Holdings, Best Buy, Ford Motor, Amazon.com, and Zipcar. Motley Fool newsletter services have recommended buying shares of Amazon.com, Ford Motor, Green Mountain Coffee Roasters, Zipcar, priceline.com, and Netflix. Motley Fool newsletter services have recommended creating a lurking gator position in Green Mountain Coffee Roasters, writing puts on Barnes & Noble, and creating a synthetic long position in Ford Motor. 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 (5) | Recommend This Article (16)

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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 04, 2012, at 3:32 PM, BFatConservative wrote:

    Thanks for the article. It spoke to concerns I have had along the way in my due diligence of Zip. I think your point about potential direct competitors Hertz and Avis being debt laden is particularly important.

  • Report this Comment On April 04, 2012, at 6:01 PM, midnightmoney wrote:

    please accept or reject this analogy: a company that encourages people to use cars is environmentally friendly like a criminal justice system would be people friendly if it encouraged manslaughter over 1st degree murder.

    Get on thy bike o green pioneer!

    That aside, I have enjoyed watching all the Fool's writers debate this company. Nice article.

  • Report this Comment On April 05, 2012, at 7:08 PM, TMFHobo wrote:

    @midnightmoney:

    Interesting point. Driving's not a crime though. As I said in my article cars are a necessity based on our infrastructure, and even the most ardent environmentalist needs one sometimes as Zipcar's ads point out. Zipcar provides a solution for people who commute by public transportation but need a car occasionally. So you could argue it supports an environmentally friendly lifestyle by making it easier to not own a car.

    I see your point though. It's definitely ironic for a "green" company to be making money on cars.

    Long-term I think the green question will be solved not by people driving less but by cars becoming more efficient. That's a whole nother story though.

    -Jeremy Bowman

  • Report this Comment On April 06, 2012, at 1:54 PM, dbtuner wrote:

    Avis is going to outfit their entire fleet for car sharing for only $120M. They bought into the company that powers the technology (IDSY). Avis currently has 10,000 cars available for car sharing with Avis On Location which is currently targeted at businesses. They will have 30,000 cars by 4th quarter of this year and will then roll out to their entire fleet next year. It will then be rolled out to consumers.

    The technology from IDSY is easy to install as a small device is attached to the cars maintenance port (the same port your mechanic uses). In 2 minutes a traditional rental car is transformed into a car sharing car.

    Users can access via a smart phone app and there is no need for a RFID smart card or to sign up and pay a fee. One way rentals are allowed.

  • Report this Comment On April 08, 2012, at 6:48 PM, jackjacobs wrote:

    Car sharing threat for Zip Car is increasing from many players, University Campus Sharing Wheelz.com, another P2P car sharing www.justshareit.com. Both claim to have a superior hardware (vehicle technology) which can do all the Geezmos that Zip Car talks about. So I feel who ever comes with a superior technology has a chance. When Hertz was growing and thought they were the only rental company, Enterprise and many others came. Same way this Car Sharing market is becoming over crowded with many players and still needs to see who the ultimate leader would be.

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