A Wary Watch on a Revved-Up Stock

This article is part of our Rising Stars Portfolio series.

Recent IPO Zipcar (NYSE: ZIP  ) warrants a place on my watchlist ... but only just. IPOs often spark great excitement until reality sets in, and Zipcar's financial reality isn't yet worth the bullishness of its recent stock-price surge.

Zipcar's business easily fits into the universe of stocks I'd normally consider for my Rising Star portfolio, which is designed to embrace socially responsible companies. More city dwellers now choose to forgo the carbon footprint associated with owning a car -- but sometimes, you just need an automobile for this errand or that road trip. That's where Zipcar comes in, offering easy self-service car rentals for quick jaunts for the carless, with the tag line, "Wheels when you want them." Users get all kinds of cool features, like keyless entry cards ("Zipcards") for signing out the cars and the ability to choose makes and models.

A "car sharing network" that boasts 560,000 members (also known as "Zipsters") across 14 metropolitan areas and 230 college campuses sounds impressive, and the company's 500% revenue increase from levels four years ago is even more so. Still, this 11-year-old company has yet to turn an annual profit. It's also got a considerable debt load of $95 million, which the company intends to start repaying with its IPO cash.

Of course, Zipcar's hardly the only unprofitable company to go public recently; Demand Media and Cornerstone OnDemand are just a few examples of other profit-free companies that recently completed IPOs.

My knee-jerk distrust of surging IPO stocks aside, Zipcar does have potential. Car-sharing certainly could increasingly appeal to environmentally conscious and frugal consumers. I'm simply not convinced that such a mind-set will catch on as quickly as excited investors might believe right now.

Besides, there are plenty of emerging alternative options for folks who yearn to own a "green" auto outright. Major contenders include the Chevy Volt, Nissan's Leaf, Toyota's (NYSE: TM  ) Prius, and Tesla's (Nasdaq: TSLA  ) high-end electric vehicles. If the current trend of increased environmentalism holds, these companies will need to compete fiercely against one another and the new wave of car-sharing services like Zipcar for the hard-earned money of increasingly green urbanites and university students alike.

Zipcar merits caution, despite its sizzling IPO euphoria. I'm watching this stock, but I'd rather enlist companies with more secure signs of sustainable profits for my Rising Star portfolio.

This article is part of our Rising Star Portfolios series, where we give some of our most promising stock analysts cold, hard cash to manage on the Fool's behalf. We'd like you to track our performance and benefit from these real-money, real-time free stock picks. See all of our Rising Star analysts (and their portfolios).

Alyce Lomax does not own shares of any of the companies mentioned. For more on this and other topics, check back at Fool.com, or follow her on Twitter: @AlyceLomax. 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. Try any of our Foolish newsletter services free for 30 days.


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