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Jim Cramer Slams the Brakes on Zipcar

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After surging 13% in less than a week, shares of Zipcar (Nasdaq: ZIP  ) plunged 9% in early trading on Tuesday. Did a new competitor suddenly sneak up in Zipcar's blind spot?

Not quite. Instead, the market's pessimism seemed to be driven by comments Jim Cramer made the night before. In one fell swoop, CNBC's colorful TV stock analyst ripped off Zipcar's steering wheel and chucked it out the window. Incredibly, the stock recovered all of its losses during the day, but investors were still left scratching their heads. Is Zipcar stuck in a ditch or finally gaining traction?

Zipcar's doom and gloom?
By slamming the brakes on Zipcar, Cramer apparently sent its stock into a tailspin. While Cramer's credentials are impressive in many respects, should a television personality wield that kind of power over a stock price?

Well, perhaps that's a question for another day, since the markets can be incredibly temperamental. More importantly, how do his arguments hold up?

If you evaluate the car-sharing market objectively, you have to admit that new threats are creeping into the picture. Enterprise recently entered the ring, joining Hertz (NYSE: HTZ  ) , Daimler's (OTC: DDAIF.PK) Car2Go service, and others as viable alternatives to Zipcar's somewhat one-dimensional service.

While I have sung the praises of Zipcar's model before, I find it hard to ignore the convenience of Car2Go's one-way car rental service or the potential for Hertz to deploy a fleet 30 times the size of Zipcar's critical markets around the U.S.

Jim Cramer finds this last factor downright impossible to ignore. In his words:

I just don't see how tiny Zipcar, with its $400 million market cap, can compete against these titans, which already have huge fleets of cars with major rental locations all over America. Enterprise and Hertz have a built-in advantage with this business. Zipcar merely has a hip brand, and that can only take you so far.

Obviously, Cramer's not so bullish on Zipcar's revolutionary car-sharing model, first-mover advantage, or incredibly high retention rates. And he makes a strong argument. In the battle of the rental giant versus the nimble upstart, Zipcar's shares, despite losing 60% of their value since the IPO, appear pricey relative to Hertz at this point.

So if Cramer's believes Zipcar's "growth may have already peaked," should investors go ahead and jump out of a vehicle that seemed to be picking up speed? Let's take a closer look.

Zipcar's zoom
Rushing to conclusions about Zipcar's weeklong stock-price run-up would be like handing your 16-year-old kid the keys to your brand-new Maserati -- it's irresponsible. However, analyzing a few storylines could shed some light on Zipcar's potential.

Sure, Cramer raises some valid points about competitive threats from the car-rental industry, but his convictions fly in the face of comments made recently by Morgan Stanley's respected auto analyst, Adam Jonas -- comments I happen to agree with.

Jonas points out that "Zipcar offers a premium service and cars that people want to drive at the best locations with a brand not associated with a tired rent-a-car industry." In other words, Zipcar's brand is precisely the reason the younger generations seem to gravitate toward the car-sharing concept.

Further, Jonas notes: "Concerns over the time/effort it takes to penetrate new cities to a profitable scale are well founded, but we believe are well discounted in the price. … We think ZIP can grow 2-3 times as fast as traditional [rental car] players." So perhaps Zipcar's valuation isn't so bloated after all?

Ironically, such enthusiasm provided a stark contrast to the rest of Jonas' recent comments on the auto industry. As reported by Business Insider, Jonas bemoaned the lack of enthusiasm for even the most attractively valued companies, including Ford (NYSE: F  ) and GM (NYSE: GM  ) . Exposure to Europe and the cyclical volatility of large manufacturers were two reasons investors seemed altogether uninterested in what Detroit currently has to offer.

Foolish takeaway
Obviously, the auto sector offers a bumpy ride these days. On top of that, all kinds of variables could throw a wrench into this market, including the fact that a younger demographic seems surprisingly indifferent to owning or driving a car at all. While I believe Zipcar remains well positioned to ride this shift in consumer trends, perhaps the volatility is too much for your tastes. In that case, avoid the sleepless nights and saddle up with three proven companies highlighted in our free report, "3 Stocks That Will Help You Retire Rich."

Fool contributor Isaac Pino owns shares of Zipcar. Follow him on Twitter, @TMFBoomer. The Motley Fool owns shares of Zipcar. Motley Fool newsletter services have recommended buying shares of Ford, Zipcar, and General Motors and creating a synthetic long position in Ford. The Motley Fool has a disclosure policy. We Fools don't 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 (3) | Recommend This Article (8)

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 June 13, 2012, at 2:48 PM, BFatConservative wrote:

    The day I even slightly begin to care about what Cramer says is the day I eat lava.

  • Report this Comment On June 13, 2012, at 6:56 PM, bretco wrote:

    Why has Fool consistantly downplayed the Hertz-Avis-Enterprise threat ? Because Zip is hip ?

    I can't think of any other smallcap that Fool has "pushed" as much as Zip, and lo and behold,

    Cramer does it for you.

    Maybe Cramer isn't such a fool (small f) after all.

  • Report this Comment On June 15, 2012, at 1:42 AM, lowmaple wrote:

    Even mighty Cramer isn't always right. Don't be surprised if you hear or read one of his Mea Culpas sometime in the future. I can't wait to see who is correct.

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