Here's Why I'll Be Booting This Company From My Portfolio

Let's take at what I know about Zipcar (Nasdaq: ZIP  ) . First, the company provides a car-sharing service that my wife and I find extremely helpful, as we use the car parked down the street from us in Chicago at least once per week for various activities. Second, the company's stock is up almost 20% since it released earnings last week. And finally, I plan on giving it the boot from The World's Greatest Growth Portfolio.  

The juxtaposition of those facts might seem odd, but there is a method to my madness.

A few weeks ago, I outlined exactly how I would go about building my portfolio for next year: Invest first and foremost in companies that demonstrate exceptional levels of innovation, with special emphasis given to those that I believe will be around decades from now.

Despite all the good news coming from Zipcar recently, I just don't think it deserves a spot in my portfolio -- which has significantly outperformed the market -- in 2013. Read below to find out why, and at the end I'll offer up access to a special free report detailing what I consider to be far better choices for your portfolio.

Don't get me wrong, I love the service
As my wife and I have grown older, we've tried to own less and less "stuff," and Zipcar has helped us immensely in that regard. Moving from spot to spot mostly on our bikes has been great for our health, and for connecting with our local community. But when we do want to use a car, we're very appreciative for Zipcar.

And the most recent earnings release was definitely a cause for celebration among shareholders. Revenue rose a solid 15% from the same time last year, and more important, new-member sign-ups rose 18%. On top of that, earnings per share quintupled, from $0.02 last year to $0.10 today.

With the company opening up services in more and more American and European locations, and a favorable  partnership in place with Ford (NYSE: F  ) , it's easy to see why some are excited.

So what's the problem?
Unfortunately, I'm starting to think that it's the car-sharing movement, and not Zipcar per se, that is truly innovative. I love not owning a car, but there have been many occasions where I needed a car to travel somewhere, stay there for a while, and then bring the car back.

Unfortunately, since Zipcar is not a point-to-point service, I'm getting charged the whole time I'm at my activity and my car is simply sitting there. Daimler's car2go program, which offers up the use of SmartCars that are located throughout several U.S. cities, is different.

Instead of having assigned spots to leave a car in, users can simply park the SmartCars on any city street within designated areas. Of course, there's no guarantee that when I need to return home, the car will be there. At the same time, the much lower-cost and lower-stress model of car2go seems far more appealing to me than just having a Zipcar sitting there while someone else could be using it.

And car2go isn't the only competition. Hertz (NYSE: HTZ  ) has its Hertz On Demand, and is completing its $2.3 billion deal for Dollar Thrifty (NYSE: DTG  ) . There's no telling how the combined companies plan to move into the car-sharing space, but you can be sure that it gives Hertz more options.

And so, I chalk this up to a lesson learned: Zipcar is innovative, but it's the trend of car-sharing that's truly a difference-maker. Just because Zipcar was a first-mover doesn't mean that innovation is in the company's DNA. If it was, I truly believe it would have begun offering point-to-point service years ago.  

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Comments from our Foolish Readers

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  • Report this Comment On November 13, 2012, at 2:03 PM, TMFGemHunter wrote:

    I don't think the "point to point" model (as you call it) could be profitable for Zipcar. The main reason it works for car2go is that the fleet is all Smart cars, which can fit into tiny parking spaces that normal cars couldn't. And even then, I doubt car2go is profitable; I think Daimler views it as a mobile advertising unit for Smart cars.

    Getting into money-losing businesses isn't innovative; it's just bad business.

  • Report this Comment On November 15, 2012, at 1:17 PM, NICKELSNICKELS wrote:

    Car sharing appears to be in a small universe (densely populated areas where mass transit can suffice for most travel). This being said, you accept the fact that major rent car companies will eventually be your competition...so what is your advantage? Over time the cutting edge idea Zipcar has will be fine tuned and developed by others with deeper pockets, better distribution and a much larger customer base. If your thinking "acquisition"?, its always possible, but that's not investing its speculating...kinda like digging for gold

  • Report this Comment On November 20, 2012, at 10:20 AM, seans887 wrote:

    @Nickelsnickels You're right about car sharing being a small universe - but in my opinion that's a positive for the model and the business, not a negative. Zipcar is able to extend its reach to many potential customers while only having to focus on a handful of "core" markets. It may be niche, but niche can be profitable.

    Users of the service (I am one) know that car2go and Zipcar serve very different purposes: since car2go only employs 2-seater SmartCars with little trunk space, car2go is used primarily by in-city commuters or for quick 1 or 2 person trips across town. Zipcar, on the other hand, is useful for bigger trips that require more seat and trunk space. These include day trips with friends, big shopping trips, or even moving. In short, I find the idea that car2go will somehow cannibalize Zipcar's business to be exaggerated, and it may even be a boon as it helps make "car-less" living easier for more people. Also I'm not sure where the idea that car2go is "cheaper" came from - car2go charges by the minute whereas Zipcar charges by the half hour, and compared apples-to-apples there is no way car2go is less expensive.

    I also think the "lack of competitive advantage" knock against Zipcar is unwarranted. It's true that Hertz has deep pockets, but I'm convinced its primary interest isn't in boosting its car-sharing business - it is defending its core car rental business. Hertz isn't interested in making car sharing easy or fun for anyone, and for that reason I think its "On Demand" service won't be successful. And to Zipcar's credit, it still has 1) a solid and established footprint in major urban areas, 2) first mover status, 3) a lean/nimble company culture that allows it to move quicker than behemoths like Hertz, and 4) an incredibly loyal customer base.

    I think Zipcar has a lot of potential pitfalls on its hands, like rising gas prices, lack of interest in new markets, and young upstart competitors with a better model - but I don't think car2go or Hertz will be the ones to unseat them.

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